Recently, there has been some wringing of hands and puzzlement in policy circles regarding the fact that while the unemployment rate is down, wages and consumer spending don’t seem to be increasing and contributing to economic growth the way certain pundits and policy wonks think that they should. The economic policy world has faced these conundrums before. In the 1970’s, economic theory, using the Philips Curve, said that low unemployment leads to high inflation and vice-versa. Pundits then were shocked to see a situation with high unemployment AND high inflation; something that came to be known as stagflation (caused by OPEC raising oil prices). In the late 1990’s, we had the reverse which was low unemployment, rising wages, and low inflation. Again, this was puzzling (the theory regarding the cause of this happy confluence of factors was improved productivity due to the computer revolution), but nobody was really complaining.

Today, we have a situation where the economy is not behaving in ways that theory and experience says that it should. We had a deep recession that statistically ended in 2009, and yet the recovery has been sluggish (unlike prior recoveries). And now, with unemployment finally down, wages (and inflation) aren’t increasing like we expect. What is going on??

While nobody knows the entire answer, one explanation is likely that the statistics (the popular unemployment statistic in this case) simply aren’t honest. Or rather, they don’t capture the economic reality that they once did. In earlier times, an unemployment rate of 5.4% would have meant that the economy was forging ahead and workers could expect raises as the supply of labor was becoming scarce. This is not what is currently happening, creating confusion. The problem is that the statistic simply doesn’t capture the fact that more people than normal have dropped out of the labor force. In earlier time periods, someone dropping out (or not being counted) in the labor force likely meant that either a.) they were never part of the labor force (think “stay-at-home” moms), b.) became permanently disabled or c.) retired. In other words, they could have 500 open jobs sitting in front of them and still would not take a job because they couldn’t (disabled) or didn’t want one.

Today, however, people are dropping out of the labor force because they are discouraged. This is not the same thing as the a.), b.) or c.) options in the prior paragraph. They want work, presumably they have some skills that would give them work, but they can’t find work and give up. These people are as unemployed as the people who are actively looking for work. That the government has decided not to count them as unemployed doesn’t change that fact any more than if the government were to decree that George Washington never existed.

With a real unemployment rate significantly higher than 5.4%, pundits wouldn’t be wondering why wages aren’t increasing, why consumer spending is sluggish, etc. etc.In order to make the best policy decisions, policymakers have to have relevant and accurate information. If the unemployment statistic is no longer relevant given the economic structure of today, then it needs to be changed. Otherwise, pundits and policymakers will continue to be confused when they economy doesn’t respond in ways that they expect. To paraphrase Fezzik in The Princess Bride, pundits should stop using the unemployment statistic as currently constructed; I don’t think it means what they think it means. The sooner everyone accepts this reality, the better.

As someone who has observed the domestic political landscape for over 30 years, one theme that has kept recurring is the word ‘Reform’. We hear about tax reform, Social Security reform, Medicare reform, financial reform, spending reform, welfare reform, etc. etc. However, with the exception of welfare reform (passed two decades ago), any reform that is passed (assuming that anything is passed at all) tends to be watered down and ineffective. The end result largely appears to the public as if nothing was passed at all. The question is, how is it possible that so many smart people, most of whom know and admit that this system or that system badly needs reform, be so unable to produce any meaningful reform?

The first thing to remember is that no matter how idiotic a situation may seem, it makes sense to somebody. This is true in a macro political system like the U.S. or in a smaller political system like the company that you work for. Any system that exists anywhere is benefiting enough people to sustain it. So no matter how ridiculous a rule, regulation, tax, or policy may seem, someone with more power and influence than you is benefitting from it.

The second thing to remember is that any reform is going remove something that is currently benefitting someone. And that someone isn’t going to like it, and will resist it, either with money, or through other measures. For all of the talk about money in politics, this isn’t the only problem. Normally when we think of money in politics, we think of powerful interest contributing money to political campaigns. While this is certainly a major factor, sometimes the influence is more basic than that. Politician X isn’t just going along with Special Interest Y because Special Interest Y gives money to his campaign or will give money to his opponent if Politician X doesn’t play ball. Sometimes it is that Politician X and Special Interest Y are friends outside of office hours, attending the same parties, seeing the same people. Maybe even their wives are friends. Under these conditions, if Politician X ticks off Special Interest Y, it is going to be personally awkward for him.

If we look at attempts at reform over the last 6 years, we see either major resistance and/or watered down reform to point of being nearly meaningless. I am speaking of ‘healthcare reform’, ‘financial reform’, and what the Tea Party might call ‘spending reform’.

In the case of healthcare reform, we are still seeing major resistance 5 years later. Part of this is because of the way it was designed to force people to do things not in their perceived best interest. Part of it is because it ignored really much input from 1 of the 2 major political parties. But the main reason for the resistance is that it proposed to fundamentally alter a system that affects everyone (everybody needs healthcare) and a system in which 70% of the public had health insurance AND liked what they had.

Financial reform doesn’t look like it has had much of an effect or will have much of an effect in preventing the next crisis because it hasn’t fundamentally altered the system. The reason for this is, yes, due to the money that Wall Street gives Washington. But the resistance to reform is simply caused by the fact that a fundamental alteration of the system would result in a LOT less money going to Wall Street. According to CNN, the average bonus this year on Wall Street is $173k!!. That is a BONUS, not a salary. The average pat on the back, “you did a good job, kid”, “way to go” money is 3.4 x’s the average household income in the U.S.  I wouldn’t want to change this system either.

Finally, the Tea Party wasn’t able to achieve spending reform. However, it was, for a brief moment, able to succeed in actually cutting spending by an insignificant amount (in terms of the whole federal budget). I say “actually cutting spending” because most “spending cuts” in Washington are not true “cuts” as in, “I spent $100 last year and I will spend $50 this year”. But rather they are a reduction in the increase of spending as in “I spent $100 last year, I was going to spend $120 this, but I will ‘cut’ this to $110”. The Tea Party was able to get a real reduction in spending, but what they had to do get it was to essentially threaten (and appear to really mean it) to crash the U.S. credit rating.

This last example illustrates more than anything the practical impossibility of real reform taking place. That cutting what amounted to a rounding error in the federal budget would effectively require the figurative taking of hostages is not a system that is capable of any meaningful reform. The proposal of reducing discretionary spending from 2013 levels to around 2010 levels was met by the bureaucracy with the shutting down of monuments and generally trying to make cuts as visible and as painful as possible for the general public. As the government was somehow able to function in 2010 without inflicting this pain on the general public, these actions were clearly punitive and deliberate. The hysteria that emanated from some quarters was to the extent that one would have thought that the proposal on the table was a repeal of the New Deal. These actions illustrate the resistance that can and will be brought to bear if any real reform is attempted.

One can only conclude that if fundamental reform in various areas is needed and necessary (and it is becoming increasingly clear that it is), this system is probably not capable of providing it.

It is difficult today to pick up an economics publication, political publication, or visit a website covering either of those subjects without seeing an article lamenting the demise of the American middle class. While the articles throw around charts with multitudes of numbers and, in the case of the political journals, presume to offer policy prescriptions for what ails us (usually the same policies that they have been offering for the last 30-40 years), nobody seems to have a good grasp on what it means to be middle class nor do they seem to have a really compelling idea for what has gone wrong.

So what has gone wrong? Before we can answer that, we need to ask ourselves what was this mythical middle class Eden from which we have supposedly descended? If one looks at tables on Wikipedia (http://en.wikipedia.org/wiki/Household_income_in_the_United_States), one sees that the 50^th percentile (or median) of real household income in the U.S. has risen from $45,595 in 1976 to $50,054 in 2011 (in 2011 dollars). While stagnating real wages have been spoken of for some time, the key word in that expression is ‘real’. The middle is keeping up with inflation (or even a little better than inflation), so in theory it should not feel like it is falling behind. So why does it feel that way?

While this is a subject too complex for one blog post to do it justice, I suspect the reason stems in large part from expectations that have been disappointed, increased economic insecurity that now exists, the effort that must now be expended to maintain a middle class lifestyle, the lack of visible improvement, the sense that upward mobility is increasingly difficult and sub-standard public services all contribute to the sense of unease. To take a simple example, a fellow who has nothing and wins $2,000,000 in the lottery after taxes and a rich fellow who lose 80% of his wealth and is left with $2,000,000 are both objectively at the same spot financially, but one is much happier than the other.

So what has caused the disappointment in expectations? To understand this, we have to accept that what it means to be middle class was largely defined for us in the 1950’s: a secure job, a family (complete with 2.5 kids), a house, a car, good schools, and a secure retirement. One could add to this the sense that tax dollars were being used wisely, and that you could, with enough hard work, get ahead if you wanted to.

So what changed? The short answer is that the external conditions that allowed this world to exist have changed irrevocably and with it likely contributed to the sense of unease now being felt. In the 1950’s, the U.S. accounted for nearly 70% of all manufacturing, roughly half the world was communist and insular (meaning that U.S. workers weren’t having to compete with those workers), Europe was still recovering from the war, Latin America, Africa, and the Middle East were unstable (meaning nobody was going to be offshoring jobs to those locations), trade protection was still high, along with transportation costs. Add to this the fact that the workforce was being populated by the generation born in the 1930’s (a baby bust generation), along with high rates of private sector unionization (something that can only happen in protected industries), and you had a worker who was largely insulated from global competition and could work 8 hours, provide for his family, and have weekends off to enjoy himself.

This world no longer exists. Today, the U.S. accounts for 18% of the world’s manufacturing, trade barriers have gone down, transportation has become easier (and less costly), manufacturing has become more automated (costing jobs), the world has become a more stable place (meaning more inviting for off-shored jobs), communism has collapsed (meaning that U.S. worker have to compete with these workers) and unionization (in the private sector) has weakened as a globalized world has eroded the bargaining position of U.S. workers.

These effects on U.S. households have been somewhat offset by women entering the workforce. It is important to remember that the median household income of $45k in 1976 was in a world populated by a large share of single breadwinner households whereas the $50k median household income in 2011 consists of a large share of two breadwinner households. So while the numbers may look similar, the quality of life that they represent is not. The 1976 family was likely to have mom at home with the kids, while the 2011 family is not. If the 2011 kids are young, the family may have to spend money for daycare resulting in more money going out the door (in real terms) than what the additional breadwinner is bringing in, thereby leaving the 2011 family in worse shape financially and socially than the 1976 family. In addition, building restrictions in many areas have driven up the cost of housing. In 1970, the median home price was 1.72 x’s the median household income, while the same number was 3.4 in 2009. Although the average house built in 2009 is around 50% larger than one built in 1970, the expectation of having a house hasn’t changed (also adjusting the 1970 number for the larger house would, all things being equal, result in 2.58 x’s, still significantly lower than 3.4 x’s nearly 40 years later). Meanwhile, the average price of a car has gone up relative to median household income from 33% in 1970 to 50% in 2009.

To this one also needs to add that pensions were more prevalent in 1970, whereas today a large share of the labor force (outside of government) is on their own where retirement is concerned (meaning that the pressure to save is greater leading to either a lower lifestyle in the present or a lower expected one in the future), and the fact that jobs are not as stable as they once were. Take all of these factors together, and you have a situation in which the middle class feels less affluent than it once did. If both husband AND wife now have to work to achieve a lifestyle roughly similar to what a husband could provide a generation ago, and retirement and jobs are less secure than before, then it is no wonder that the middle class ain’t what it used to be.

Another April 15^th is upon us, and many of us have recently paid someone to help navigate the treacherous shoals of a tax code so complex that even the head of the IRS admitted that he doesn’t “know how anybody understands all of the ramifications of it”. This complexity results in Americans and American businesses spending over $100 billion dollars simply to move money from Point A (the taxpayer) to Point B (the federal government). If the purpose of the tax code was simply to raise enough money to fund the government, then the code would not be this complex and we wouldn’t be wasting endless hours filling out pointlessly complex forms, paying people to help us fill them out in order to make sure that we don’t get caught making an inadvertent mistake.

But the tax code isn’t about simply raising money, but is an effort to socially engineer outcomes believed to be desirable, used by the powerful to reward their friends “with special tax breaks & loopholes”, and to punish their enemies by encouraging the IRS to come down hard on them. While many things have contributed to the sluggish economic recovery over the last 6 years, one of the contributing factors is that companies and individuals are spending time filling out forms (of any kind) and working to comply tax regulations, and aren’t spending that time working productively and growing the economy.

The first problem is that trying to socially engineer outcomes is always a difficult proposition because large, complex social systems are inherently too large to predict with certainty the outcome of any policy action. There are always unintended or unforeseen consequences that often have irreversible impacts. As modifications are attempted to correct the problems that arise from the original policy, more unintended consequences arises, with still more regulatory fixes, until you have an overly complex mess that nobody understands. And it is not at all clear that the resulting outcome is any more desirable than what would have resulted without the tax code.

Second problem is that the tax code is used to reward politically connected people & corporations, thereby leading to political corruption. By creating a byzantine and opaque tax code, the advantage goes to people/corporations with sufficient resources to adequately navigate it and to “influence” (aka bribe) politicians into carving out loopholes for them. This leads to economic distortion as resources are not led by the ‘invisible hand’ of the market to their most efficient use, but rather are led to their most politically effective use. Ultimately, economic resources are wasted and the country is poorer overall as a result. If those crying about “too much money” in politics really want to reduce its influence, they need to remove opportunities for corruption, which is about taking the politics out of money.

The third problem with the opaque and byzantine tax code is that it allows the government to punish its opponents. Although the IRS has recently gone after opponents of the Obama Administration, any future President can use the tax code as a weapon to silence his political opponents. In addition, the nature of bureaucracies is such that it is very hard to prosecute people as they have the power to make evidence disappear with nobody saying a word; something that would get a normal person jail time. The poster child for this appears to be Lois Lerner whose actions against conservatives it appears will go unpunished. She won’t really lose much (pension, etc.) for destroying those people’s lives. A system whereby some can destroy the lives of others without incurring risks to themselves is not a system that will result in the sort of dynamic economy that we have known in the past. As the advantages/risks of being politically on the wrong side increase, politics will become more vicious as people/corporations feel that they are fighting for their lives. The result will be political instability, which as one can see in countless cases around the world, leads to economic instability and stagnation.

As the modern world dawned, there were many problems that the government really needed to get involved with and help solve. The cities of the late 19^th/early 20^th century were horrible dirty places, and things like sanitation, electrification, etc., were things government needed to step in and help out with. As weapons of war became more sophisticated and the world moved faster with phones, planes, trains, cars, etc., we needed a larger government to help manage these challenges. Consequently, an income tax may have been what was called for at the time.

However, it is now clear that the costs of this system a far outweighing the benefits. Scrapping the income tax and putting on a national sales tax with a few exceptions for food and shelter could be set high enough to generate the revenue the government needs without the opportunity for corruption. It is time to scrap the tax code.

Several years ago, aspiring presidential hopeful John Edwards spoke about there being “two Americas”. Basically, the gist of his assertion was that there was one America for the rich and one America for the poor. The years since have seen variations on this theme from the 1% vs the rest, rich whites vs poor minorities, the disappearance of the middle class, etc. However, I would posit that the real economic divide in this country is increasingly between those who take life seriously and those who don’t.

In 2009, a Brookings Institution study found that Americans who finished high school, acquired a full-time job and waited until age 21 to get married before having children had a 98% chance of not ending up in poverty and had a 74% chance of ending up in the middle class (defined as more than $50,000). On the other hand, those who violated all three norms had a 76 percent chance of winding up in poverty and a 7 percent chance of winding up in the middle class. Another study a couple of years ago had the factors as finish high school, don’t have kids before marriage, and (married or not) don’t have kids before the age of 21. This one found a 94% chance of not ending up poor if one does all three things.

Not finishing high school is pretty obviously a way to hinder ones job prospects. High school is one of basic building blocks for having even a basic sort of entry level job. However, I believe that the underlying cause of not finishing high school is often a fundamental lack of seriousness. The average standards of the modern public high school are such that maintaining a pulse and simply showing up can often be all that is required to graduate. While a rigorous high school curriculum that one failed to finish could often of course mean that one simply, despite ones best efforts, was not intellectually gifted enough to complete it, the simple fact is that what often passes for a high school curriculum is not terribly difficult. Failing to finish, is often likely due to simply not taking it seriously enough to show up.

As for having kids at a young age or out-of-wedlock, the availability of birth control mitigates against a large number truly accidental births. The fact that over 40% of all live births in the United States in 2012 were out-of-wedlock is simply an indictment. It simply isn’t reasonable to suppose that almost half the births were the result of ‘oops’. Having a child is the most important duty that a civilization and our species assigns. Without children, our species which has survived for millennia can’t continue, and children who don’t grow up as functional adults (as so many children who grow up without fathers don’t) won’t be equipped to allow our civilization to survive either. It is a decision and an act that deserves to be taken seriously, and the over 40% number is an indication that it isn’t.

If people don’t take the decision to finish high school or to establish themselves before having children seriously, it is not a hard stretch to suppose that they don’t take other decisions (getting more education, upgrading their skill set, saving money, managing their money, etc.) seriously either. While simply not ending up poor isn’t the same as saying that one will be rich; not ending up poor is not an unreasonable goal to have. It is hardly surprising that a person who doesn’t put much effort into something (say sports) isn’t going to be very good at it. A person who doesn’t take life seriously isn’t going to be very good at it either, and they are going to continue falling further behind those who do take it seriously. And they deserve to.

One of the fads that has sort of taken off in recent years is that of people putting solar panels on their homes. Often, some people balk at buying them when they realize that the loan payment that they have to make will be more than what they currently pay for electricity. If the system could be made cheaper, obviously more people would buy them.

But what does this have to do with political conservatism? The fact is that many of those folks who pound their chests about the Constitution often wonder why people don’t get more exercised about real and imagined constitutional violations. What these individuals fail to understand is that the Constitution was written for a pre-industrial society very different from our own. Specifically, 200 years ago, most people were either farmers or small shopkeepers. In other words, the food on their table came largely from their own efforts or the efforts of those with whom one was acquainted. A king, governor, or other faraway government official who tried to pass a sweeping law to restrict or manipulate the market was going to have a direct and visible impact on the ability of a large swath of the population to put food on their table, and consequently would face overwhelming opposition. Today, if one listens to economic arguments from the right (lower taxes, less business regulation, etc. etc.), they are focused on that swath of the population that is either self-employed or is employed by others but sees the health of the business environment being tied to their own economic well-being.

However, we don’t live in a society any longer where how one lives is almost entirely and visibly a function of one’s own efforts. We live in a society in which the multiple and complex interactions of a multitude of factors determines how one lives on a day-to-day basis. We are dependent on the power company for electricity, the town/city for water and sewer services, and on local government for police and fire services. We are dependent on our boss for a paycheck, and the agendas of other people who we haven’t met as to whether there is even a job in existence at all. And given that most of us have to make 30 years of payments until we even have a roof over our head that we can call our own, most of us cannot be said to be economically free. While some on the right (and sometimes on the left) decry a loss of political freedom (i.e. the NSA, the IRS, etc. etc.), the truth is that most of us have never been truly economically free and independent in the sense that the colonists were when the Constitution was written.

So what does this have to do with solar panels? If those on the right want a modern society that is responsive to, shall we say, traditional constitutional concerns, then they need to find ways to use government to make people less dependent on anyone (including government). Often, the extent of the right’s thinking on this score is to “cut government spending” and “reduce regulation”. Then they fight a (mostly losing) battle to make this happen. But “cutting government spending” is cutting off someone’s paycheck and so the opposition is fierce. However, subsidizing solar panels (for example) is something that would make people less dependent. While solar won’t provide all of a household’s energy needs, it does reduce dependence on an outside power source, and thereby (depending upon where a household lives) increase the economic independence of the household. Further examples of using government to foster some independence would be land use policies that encourage the building of homes where people need to be on wells and a septic system, rather than being dependent city water & sewer. Or, the automatic payroll deduction of taxes can be eliminated and people can save up the $5k, $10k, 20k etc. of taxes that they owe each year and pay it in one installment. The point is that if people have to save up the money rather than having it taken from them bit by bit, they will feel the bite more acutely and perhaps pay attention to what the money is going for. Also, it will keep the government honest as any action the provokes bitter opposition would allow those opposed to refuse to send in their taxes and force the government to spend time and energy chasing down the multitude of tax miscreants. This is not intended to be an exhaustive list. But if the right (and sometimes the left) want a country responsive to traditional constitutional concerns, they need to use government to create a more economically independent citizenry whose day-to-day lifestyle is less dependent on others. Subsidizing solar panels is an example of a step towards this goal.

As economists are celebrating a strengthening U.S. economy even as a global slowdown appears to be increasing in likelihood, the last seven years have fundamentally changed our understanding of the American economy. One of the lessons that we have learned is that it is possible to have high unemployment and many employers unable to find employees at the same time. Also, we can have immigration (illegal) continuing as people come here looking for work along with millions of native born Americans unable to find it. What explains this? While political partisan have their favorite explanations and scapegoats, I believe that the answer is more structural than political.

The primary factor is that the nature of work itself has changed. In economic models that assume a flexible (and free) labor market, people can move from one job to another and from one industry to another fairly easily. In the pre-industrial and early industrial society, this was true for a lot of jobs. Working on a farm or in a factory was the sort of job that could be taught fairly easily, and to the extent that the jobs were repetitive, a person could master them within a few days or weeks. Loss of a job at the automobile factory could be easily replaced by a job at the soup canning factory. A job milking cows at one farm could be replaced by milking cows at another farm. My grandfather, with no special skills, left his father’s farm in Illinois and worked for various farmers, traveled to Wyoming where he worked as a ranch hand, and then moved on to Seattle where he intended to get a job with the fishing fleet, until the army recruiter caught up with him. His experience was not that atypical for many men.

Today, however, the labor market is much more specialized and movement between jobs is much harder. For example, while a person can learn a job, so much of what makes a person effective is experience in that job. An auto mechanic can be taught how to tighten bolts fairly quickly and learn the basics of how engines work, but troubleshooting what is wrong with an engine can take years as he builds up a reserve of experience to know that when an Audi engine sounds one way, it can mean 1 of 3 things, or that when a small Toyota truck engine sounds another way it can mean 1 of 4 things. Or a worker at ABC Company can spend 10 years learning how to be effective specifically at ABC Company. However, retraining an auto mechanic to be a plumber means that he now has to spend years building up a new reserve of experience dealing with plumbing problems. Or the worker at ABC Company may find that his skills are very ABC Company-specific and don’t translate well to a similar position at XYZ Company. Thanks to the internet, companies can now look to hire people with exactly the skill set they are looking for, rather than people who have kind-a, sort-a, similar skill sets who can theoretically be trained into the job that the employer really wants done. What this does to the labor market is that many people who lose their job have a very difficult time finding a similar job. The result is that you end up with a group of discouraged people who drop out of the labor force, or they are forced to take other jobs at reduced pay, or they are forced to start their career over completely in another industry (at reduced pay).

Going forward, while government and social institutions will pretend that they can fix this problem (and consume large volumes of taxpayer cash for doing so), they really can’t. A specialized labor force has delivered high quality customer service and has produced an iphone world where many things are delivered when you want, in the quantity you want, and with the quality you expect. While the system has been disruptive on a personal and social level, is not, along with the internet, going anywhere anytime soon. Consequently, we can expect a mismatched labor market to be with us for a long time to come.

With the Obama Administration in its sixth year and with Administration opponents leveling charges of “lawlessness”, it is tempting to view this as just more partisan sniping from predictably partisan people. However, with the economy seemingly on the mend, “lawlessness” as an issue is easily seen as a distraction from what is really important (economic growth). But the truth of the matter is that “lawlessness”, especially when it involves the government, is even more important than a single jobs report or GDP number.

The first problem with confronting supposed lawlessness of the Administration is that many don’t see it this way. They see a President confronting what they regard to be unprecedented opposition from the opposing political party, and being forced to take action to solve pressing problems. Some concede that perhaps Obama is going too far with some of his actions, but that is usually excused by the hardened political opposition that Obama faces.

What these defenders of certain questionable (from a legal perspective) actions of the Administration fail to take into account is that legal stability is a prerequisite for the economic strength that America has historically had. The questionable actions of the Obama administration didn’t begin with unilaterally (and illegally) suspending controversial parts of Obamacare, or his questionably legal executive actions on immigration, but rather his action during the GM bankruptcy which overthrew a couple of centuries of bankruptcy law which says that first priority creditors get paid in full before second priority creditors get paid anything. In the negotiations, Obama used the power of government to force first priority creditors to accept 29 cents on the dollar while second priority creditors (such as the United Auto Workers, a campaign supporter of Obama and the Democrats) recovered substantially all that it was owed.

The problem with actions such as these is that they undermine the basis of trust and belief that legal contracts will be enforceable as written. Businesses and other economic actors make decisions based on laws that are written, and the belief that those laws will be enforced by whoever is in power without prejudice. An Administration that refuses to enforce laws that it doesn’t like, or enforces laws in certain cases (where it likes the outcome) but not in others (where it doesn’t like the outcome), or invents rights and privileges for certain controversial groups that Congress refused to authorize, undermines this trust.

The economy of the U.S. is based on people/businesses making long-term investments. Buying a house is a long-term investment. Building a factory is a long-term investment. Starting a partnership to build a business is a long-term investment. When people start to doubt that their contracts will be enforced, or that the likelihood of that enforcement will depend on the unknowable political situation existing at some specified point in the future, they will make fewer of these investments. The result will be lessened economic activity and the U.S. will be poorer for it. Nor is this idle speculation. We can see the result of societies operating with politicized extra-legal actions/ politicized law enforcement around the world. We don’t really see world class economies operating in this bunch.

The other problem collectively with Obama’s actions is that they seem to show a pattern of behavior (as opposed to a one-off response to a national emergency like 9/11, or even the market melt-down in 2008 when it appeared that the global financial system was about to collapse). A pattern of behavior has the potential to change the culture, especially when partisans for that side excuse (and some cases praise) these excesses as desirable, because they support the ends (ends justify means). The problem is that the other side may (and the longer this goes on, will) conclude that they are justified using the same tactics to achieve their ends, ends which they are as fervently attached to as Obama’s supporters are to their ends. Or, normal people will conclude that the law is only there to be manipulated by the powerful and will feel morally empowered to ignore the law where it is inconvenient (ie. to cheat on their taxes, the way those in Greece do today). Neither of these outcomes bode well for economic strength and stability.

Simply put, following and enforcing the law, especially when you don’t specifically like the outcome (or it is politically inconvenient), is a prerequisite for a strong and stable economy. A system in which the law, or application thereof, is dependent upon the political interests of the powerful and politically-connected is not one that is going to have what we now know as a first-world economy. While suspending the natural democratic processes temporarily during times of national emergency like WWII or 9/11 may be unavoidable and necessary, it can’t be allowed to become a pattern of behavior without doing serious damage to the system. Maybe suspending parts of Obamacare were desirable as policy (i.e. the law would have been better without those things), but it wasn’t a national emergency. Maybe legalizing millions of illegal aliens is a good policy, but it isn’t a national emergency. Maybe effectively suspending bankruptcy law to benefit the United Auto Workers was good policy, but it wasn’t a national emergency. Those who support this ends justify the means approach are contributing to its normalization. This will ensure its use by the other side when they get in power (and maybe even in a more expansive way), which will result in the destabilization of the basis for a strong, modern economy.

Over the last few weeks, Greece has once again dominated the headlines with yet another of their periodic crisis and potential threats to leave the Eurozone. Economic pundits breathlessly comment on what an exit of Greece from the Eurozone would do to the E.U., and by extension, the world economy.

Part of this is designed to sell newspapers. After all, Greece is the 51^st largest economy in the world according to Wikipedia, behind such economic powerhouses as Nigeria, Bangladesh, and Vietnam. If the health of the world economy is dependent upon the actions of a country this size, then we might as well throw in the towel now. Of course, one will correctly argue that it is not the fact that Greece leaves the Eurozone that is by itself the problem, but rather than by leaving it will show that one can leave the euro , a taboo that has not yet been broken, which will prompt other more consequential states such as Spain (16^th largest economy) or Italy (12^th largest economy) to exit thereby possibly unraveling the Eurozone or even the E.U., with ensuing bad economic consequences.

This seems like it could be a systemic problem with large economic blocs. This is a relatively new problem, as free trade zones such as NAFTA or the E.U. have never really been tried before in human history. Unfortunately, policymakers and economists who draw up economic models showing the benefits of free trade (and there are a lot of benefits) have failed to capture the fact that these economies are made up of nation states and national cultures. The economic structures in those nation states, for better or worse, are products of those same national cultures. The idea that 19 countries with 19 national cultures could be happy with a single currency and a single monetary policy will likely strike future generations as the height of insanity. Telling Greeks that they have to act like Germans, and telling Germans that they have to act like Italians, and telling Italians that they have to act like Estonians is not an undertaking that is likely to have success over the long term. The economies simply aren’t as integrated as they must appear to the gatherings of foreign ministers and academics who come up with these policies, in whose circles there is largely a single culture. As someone who obtained a masters degree from a business school in which 80% of the students were foreign born, I can tell you from personal experience that in those circles, one doesn’t really notice national cultures much.

However, national cultures do exist on the street, and the economic structures and expectations shaped by those cultures will make it difficult for economies to integrate to the extent that would be necessary to have a smoothly functioning single currency area. By trying to force cultures together as the E.U. has done with the euro, it has ended up discrediting the idea of free trade in certain circles and has ultimately led to more economic instability than would likely have occurred in its absence. Economic blocs like what the E.U. has tried to be might still work, but they would have to be done on a smaller scale with cultures that are somewhat similar like Germany, Austria, and the Netherlands or like the U.S. and Canada. The problem with economic blocs may be that their architects try and grow them too big too fast (they would like to have their names in the history books after all). But when they do this, they may end up creating more problems than they solve.

As the economy seems to be turning a corner while at the same time dark economic storm clouds appear to be gathering on the horizon, economists are still trying to come to terms with why the latest economic recovery has been so sluggish to the point that more than half of all Americans still believe us to be in a recession. While partisans on both sides have their favorite explanations, which often are the same explanations that they always have for everything, one explanation that I believe has some merit is that we simply have an economy that is over-regulated.

One way to think of regulation in general is that it imposes a cost on business. This doesn’t mean that there should be no regulation, far from it. But to ignore that each regulation costs businesses money is to simply deny that there is any downside to any regulation at all. But regulations have costs. People must be hired to ensure compliance. Paperwork must be filled out. Monitoring systems must be put in place. Lawyers must be hired. And as various state and federal agencies generate more regulations, more paperwork must be filled out, more lawyers hired, etc. etc. All of these costs add to the overhead expense of a business, costs that may or may not be able to be passed on to the customer.

While regulation costs businesses and, to the extent that the businesses can pass on those costs, consumers, it also costs the economy as a whole. This is because all of the resources that go into the regulatory structure of producing and complying with regulations are resources that can’t be used in economically (i.e. wealth-creating) productive ways. The highly intelligent lawyer engaged in regulatory compliance is a highly intelligent person who is not figuring out a way to produce tangible products using fewer resources. A pencil-pushing bureaucrat stamping regulatory forms is one more potential factory worker who could be making cars. And the small business owner who is spending his time complying with regulations is not spending that time figuring out how to build more houses, or fix more cars, or plant more crops. The extreme case of this involves the tax code, which costs Americans over $100 billion dollars annually to comply with. That is $100 billion dollars simply to move money from point A to point B, something that could be effected for almost nothing by scrapping the tax code and going to a national sales tax. This $100 billion dollars is a dead-weight loss to the economy in that we are spending the resources and getting the same result as we would have with a national sales tax.

As for whether we are producing too many regulations, consider the sheer volume of regulations that have been produced since 2000. Are Americans really visibly that much better off than they were in 2000? Since 2000, the real size of the economy has grown by 28% over the last 14 years, compared with 60% over the 14 years before that. And all of that regulation didn’t prevent the tech bubble or the real estate bubble, even though very smart regulators had their finger on the pulse of it at all time. If all of those regulations didn’t prevent the near collapse of the global financial system, were they really necessary?

In short, some regulations are clearly necessary and some are not. Many safety regulations and environmental regulations that were put in place in the 60’s, 70’s, and 80’s  have made the air cleaner, workplaces safer and Americans healthier. If you don’t believe me, look at pictures of 30-40 year olds in 1970 and look at them today. You will see that the people today tend to look about 10 years younger than they did then. But as necessary as some regulations are, there will always be a point at which the costs outweigh the benefits. At this point, more regulations will drag the economy down.

I believe that the idea that we are past the point where regulatory costs largely outweigh the benefits is extremely compelling.