I am happy to report that ‘I Want A Divorce-Why America Needs To Go Its Separate Ways’ is now available on Amazon.com and Createspace.com.

In this book I lay out the reasons why I think it might just be better if Americans went their separate ways. Like an old married couple who realizes that they have grown apart and have nothing in common, Americans are increasingly living in separate worlds that, apart from language, have little in common with each other. The day-to-day experiences are in many ways so divorced (what does a rural North Dakotan have in common with a San Franciscan) that it is increasingly impossible for them to even comprehend the other. Consequently, it is becoming increasingly difficult for each side to view the other as being part of the same country, whose rights and views deserve respect. In an alternate universe where instead of 50 states we had 50 separate independent countries, it would be highly unlikely that California and North Dakota would choose to be part of the same political entity. Historically, countries that begin to diverge in extreme ways eventually end up in violent confrontations. Rather than allowing that to happen, I argue that it is time to start considering how Red America and Blue America might arrange an amicable divorce.

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Over the last 50 years or so, and truly accelerating after the collapse of the Berlin Wall, the doctrine that free trade is a good thing has been institutionalized. Although the freeing of trade barriers has largely been a good thing, relative to what the world looked like 60 years ago, the idea that more free trade is always better is erroneous. Simply put, we might have reached a point in which more free trade may be more costly than the benefits would justify.

Although the basic underlying theory is sound, and nations who engage in freer trade are generally better off than those who don’t, there is no free lunch in economic policies. There are costs to any policy that is pursued, even if those costs don’t necessarily show up in the GDP number. The idea that free trade is, in fact, a free lunch is based on the concept that two countries should trade, even if one country can produce goods more cheaply than the other country, if the less productive country has comparative advantage (i.e. the productivity gap between the more productive country and the less productive country is less for some goods than for others).

A simple example would be a world in which Mexico and Italy produce only two products, wine and cheese. It takes Mexico 7 units of labor to produce a wine and 5 units of labor to produce a cheese, whereas it takes Italy 3 units of labor to produce either a wine or a cheese. Although Italy is better at producing both wine and cheese, the theory says that Mexico is relatively less worse at producing cheese (5 units of labor) than wine (7 units of labor). In a non-free trade world, Italy must give up 1 cheese to produce an extra wine, and vice versa. In a free trade world in which Italy produces only wine and trades with Mexico for the cheese it needs, Italy is able to obtain more than one cheese for every wine, and Mexico (which must give up 7/5 of a cheese to get 1 wine in the no-trade scenario) is able to get one wine for say every 6/5 of a cheese. As this theory is expanded, support is generated for free trade across all markets including the free trade of labor (i.e. unrestricted immigration).

What this theory leaves out is all of the costs associated with free trade. True, economic dynamism produces winners and losers, and nobody would seriously argue free market capitalism hasn’t been the greatest force for increasing the basic standard of living in human history. However, the theories assume that as old industries are displaced, new ones arise and the displaced labor is easily able to move into those jobs. This theory pretty well described reality when most jobs were easily learned jobs. However, today’s jobs, especially in the first world, are often highly specialized and it can take years to get really good (i.e. highly paid) at them. In many ways, they are like the craftsman jobs in the Middle Ages that would take years to master. For example, a doctor can’t easily become an auto mechanic, and an auto mechanic can’t easily become a computer technician, and a computer technician can’t easily become a commercial lender. It is not just a matter of retraining one person to do another job. In many cases it takes years of experience to become proficient at the new job. So when jobs are “sucked” out of an economy, in some cases that labor does not simply retrain into another job.  The labor may become permanently unemployed, or may work at a job with less value added, or could end up in another more productive industry. To the extent that the result is the first two cases, that is a net loss to the economy

One other major cost that is often ignored is that the theory assumes (or advocates) allowing the free flow of labor from one country to another. In a world in which everyone was the same culture this wouldn’t be a problem. However, we don’t live in such a world, and cultures do clash with each other as history shown again and again. Allowing unrestricted immigration can produce friction with the host culture which, at the very least, will require government resources to manage it. Sometimes, the friction can get so extreme as to explode into violence. Whether this is a net benefit for host country or not requires a cost benefit analysis. While it often turns out to be a net benefit, it is not guaranteed to be so. Also, the host government must possibly contend with the social costs of displaced native labor with immigrant labor. While the idea that the immigrants are “taking” the jobs of the native-born is easily debunked in an era of full employment or if the immigrants are filling highly specialized positions that the native born lack the skills for, it is much harder to debunk in an era of high native-born unemployment where the immigrants are filling medium skilled positions for which there is a sizeable (and unemployed) native-born labor force.

Overall, the cost of free trade ideology is mounting. For example, global financial interconnectedness has allowed bad housing bets in California to be transmitted around the world and negatively impact, say, Indonesians. And people who see their jobs outsourced and are forced to settle for jobs that pay half as much as their old jobs are not seeing the benefits of free trade. Also, the E.U., which was supposed to increase economic inefficiency through the lowering of trading costs and a common currency, has instead created a lot of economic disruption and instability, rendering the economic benefits less visible or even muted them. While some economic pain is unavoidable in a dynamic economic system, it is imperative that the costs not be discounted. The more losers a policy produces, the more resistance will build to that policy. Although some free trade is a good thing, too much of it could produce sufficient resistance that an open global economic system could be endangered.

In the operation of modern economies over the last 100 years, countries have come to rely on economists, and people trained by economists, to steer the economic ‘ship’ so to speak. As the economies have become more complex and the demand for economists has increased, economists have created increasingly mathematically complex models to explain and predict economic behavior and to advocate for policies that they believe are optimal. Many economists have even come to believe themselves to be scientists and have become quite self-assured in their pronouncements. However, the economic performance over the last 6 to 8 years has thrown some much need public doubt, and in some cases self-reflection, on the practitioners of this social science.

The first problem with economics is its pretension to be a science. While it certainly can make observations and perhaps even draw broad conclusions from them, it is not making these observations in controlled lab experiments. In order for something to be considered in line with the scientific method, it must be repeatable and falsifiable. In the real world, the economic ‘observations’ are data points that often occur within many different social, political, and cultural contexts. In other words, it is questionable as to whether these ‘observations’ can truly be classified as ‘repeatable’. While this by itself does not render them completely useless, it simply means that the lessons drawn from them can be of varying relevance when applied to other economies in other situations.  In addition, economic theories are not truly falsifiable in a scientific sense. One wag described an economist as a person who can be always wrong and still be considered an expert. If economic theories were truly falsifiable, and if economists were truly ‘scientists’, then there should be no socialist/Marxist/communist economists, just as there are no anti-gravity scientists. However, the fact that there are many of these types of economists in academia in the West is an indication that we are not dealing with true scientists. Just because central planning did not work to create wealth and prosperity in any context in which it has been tried and applied does not mean that no such context necessarily exists.

The second problem with economics as a science is its over-reliance on mathematics. Many economists create exotic mathematical ‘proofs’ of their assertions which implies a level of scientific precision that simply does not exist in that field. In the field of financial economics and financial portfolio management, theories, recommendations, and financial derivative products are based on statistical models that use past data to estimate and predict what the future will look like. The problem with this is that many of these models are based on observations drawn from one specific time in history (the last 80-90 years). While ‘Black Swan’ events can cause the economy to ‘change course’ as it were, economies (and economic expectations) can also change and evolve over time, with the upshot that the same policy applied at two different points in time can have very different results. One example of changes in perception would be that the generation that experienced the crash of 1929 and the ensuing Depression never really saw stocks as anything more than a wildly risky investment that one would be crazy to base ones retirement on, while the Baby Boomers, and to a lesser extent Gen Xer’s, see them as precisely that. Consequently, investing behavior changes and that changes the paths that stock prices take. A policy of low interest rates by the Fed is going to have differing impacts on stock valuations when applied to these different populations of investors. Note also that the bursting of two financial bubbles and the resulting economic fallout will have a significant, although as of yet unknown, impact on the psychology of those who have come of age during this period. What this means is that simply plugging in historical observations into a statistical model to try and predict the future won’t have the precision to justify the confidence of those making predictions. In the short term (6 to 24 months) price movements can be impacted by any unknowable random thing. In the long term (10 to 40 years), the world can change to such an extent that the prior observations are as meaningless as trying to devise a military strategy for a war today based on the military technology that existed in 1800. It is not likely to be a successful enterprise.

Simply put, the pretention of the field of Economics to be a science leaves a lot to be desired. This is not to say that the field of Economics hasn’t made important contributions to our understanding of how the world works. It most certainly has and will continue to do so. So has philosophy, religion, history and other academic subjects. However, the world is simply too complex and changing too rapidly to be accurately predicted by mathematical models based on historical observations. Remember that the next time someone on television or in the newspaper makes a prediction.

Over the past 5 years or so, economists and pundits have been puzzled with the sluggishness of the current economic recovery. This recovery has been so anemic to the point that more than half of all Americans still thought that the economy was in a recession, as of March of this year. Economic historians have noted that every economic recovery since the 1970’s has seemed to get weaker and weaker than the previous one. One historian has even noted that the reason unemployment fell to an extremely low 4% in the previous two recoveries (1992-2000, 2002-2007) is that the expansions lasted so long allowing for the accumulation of jobs, thereby masking the weakness of the job growth. This is in contrast with the immediate post-war recessions in which the downturns were met head-on with the Fed lowering interest rates and the economy resuming robust job growth shortly thereafter. However, economists have not been able to put their finger on what exactly changed and why public policy has not been able to engineer similar recoveries as it seemed to be able to in the immediate postwar period.

I think that when one is looking as to why the same policy (i.e. the Fed lowering interest-rates) does not have the same effect over various time periods, the answer lies in the underlying conditions in which the policy is being attempted. What is extremely clear is that the underlying economic structure of the United States has changed since 1980.

First of all, we are much less industrialized economy and more of a service economy. It is possible that an economy that makes things is more responsive to changes in interest rates than one in which specializes in intangible type services. While it may not be abundantly clear why this would be the case, it could be that investments in production capacity anticipate economic expansion, whereas those in service type businesses react to economic expansion. For example, service-type businesses often have labor as their main factor of production, which means that firms often wait until their existing workforce is stretched before adding service providers. This means that service companies will tend to be adding workers later in the expansion cycle, all things being equal, than a production business which has to make a guess on what future orders will be, hire the people, buy the raw material, produce the product, and then hope that the demand is there.

Second of all, the last 30 years has seen a massive growth in business regulations. While regulations were growing for decades prior to 1980, they have continued to grow. It could be the mountains of regulations have simply started to weigh down the economy so that it can’t recover as fast due to growing red-tape. We do know that if you start from an unregulated economy and start adding regulations over time, eventually you will reach a point at which your economy will slow, then stagnate, and then, in an extreme case (i.e. the Soviet Union) collapse. While we may not be at the Soviet Union stage, the fact is that there has been no major rollback of regulations for decades. And consider for a moment all of the regulations that have been written since 1999. We lived very well in 1999 without any of the regulations that have been added since then, and we did so very, very, well. Which leads one to ask, were all of the new regulations (which impose an economic cost) that have been instituted over the last 15 years really necessary?

Finally, there is the matter that trade has become freer, economies that were previously closed (Soviet Union, Eastern Europe & China) that have entered the international arena to compete with the U.S. American companies have been able to outsource work overseas (even some service jobs) that they were not able to do before. This means that any given economic expansion will mean more jobs in the U.S. and more jobs overseas to meet U.S. demand, whereas previously it meant more U.S. jobs to meet U.S. demand. While this is highly simplified, and while freer global trade has meant cheaper goods for U.S. consumers, at some level it has meant fewer U.S. jobs in an expansion than would likely have been the case a generation ago.

Overall, the sluggishness of the U.S. economy is likely due to these factors, as well as other factors that I haven’t mentioned. One thing to notice though is that for all of the political squabbling about the economic policies of this Administration or the previous Administration the factors that I have mentioned preceded either of the Administrations and are largely factors beyond the control of any given Administration, Democrat or Republican. While there are certain things a given Administration could do to improve the situation (i.e. roll back regulations), we will likely never return to the 1945-1980 era economically because the world has fundamentally changed. Get used to sluggish recoveries.

Judging by the Right Track/Wrong Track numbers on Realclearpolitics.com (-37%) it seems clear that America is going through a crisis of confidence. While Republicans might point to the number as a sign that Obama has steered America in the wrong direction, the simple fact is that the numbers were negative under George W. Bush as well. Congress has approval ratings permanently stuck below 15%, and these numbers are only slightly better when Democrats hold both houses of Congress. Looking at the numbers, listening to pundits, and talking with ordinary people, it is hard to escape the sense that something has gone dramatically wrong, and it is not clear that anyone has the answer to the problems that the country faces.

While there are many factors contributing to what is happening, at a political and governmental level, the institutions are outdated, and it is not clear that they can be changed. One of the genius features of the American institutional structures up to this point in time has been their ability to change with a changing world. Another way to look at it is that America, up until now, has not had its mistakes “baked” into the system.

However, at a political level, the political parties are wedded to out of date ideologies, and prisoners to interests that were created decades ago. The ideologies are a way of explaining the world. The problem for us today is that the dominant ideologies did work at certain points in time. For example, the Democrats ideology of a government solution for every problem worked in the 1930’s, and the result Democrat dominance of the White House, and often of Congress too, for the next 36 years. Many conservatives of the day argued, unsuccessfully, that the Democrat policies would bring ruin to America, but they didn’t. For the Republicans, their ideological affinity for tax cuts and military spending came in the 1980’s. Many argued that Reagan’s view tax cuts would spur economic growth was erroneous, and that an insane military build-up would provoke a war with the Soviet Union. But it didn’t. The economy boomed and the Soviet Union, America’s arch-nemesis, collapsed. However, the lessons that both political parties have taken and institutionalized is that government programs cure everything on one side, and that tax cuts cure everything on the other side. The response of George W. Bush to the 2001-2002 recession, and the response of Barack Obama to the 2008-2009 recession were simply textbook Republican and Democrat responses to recessions with no real thought to the fact that the 21^st century might need different policies than were needed in the 1930’s and the 1980’s.

A further outdated set of institutions are the government bureaucracies. The institutional structure that we see today was largely created in the first part of the 20^th century, expanded upon rapidly in the 1930’s, and been steadily added to ever since. While this structure might have made sense in a world without computers, the internet, various technological productivity enhancements, it makes no sense today. In addition, there are certain services that government (or quasi-government entities) were created to do, that the private sector now has methods for accomplishing the same task (i.e. the post office). While the private sector has had a couple of retooling/ reform periods, our government operates largely as it did in the 1950’s.

One need to look no further than Osama bin Laden to see how a handful of individuals were able to use basic everyday items that really didn’t exist in the 1950’s to attack the most powerful nation on earth; an attack reminiscent of the Pearl Harbor attack that took the power and resources of a first world nation to pull off 60 years prior. And let’s not forget that it was private citizens on United Flight 93, and not anything that a government agency was doing, that thwarted the mission of the last plane, and may have saved the lives of people in Congress or the White House. The point is that the world moves much faster than it did 60 years ago, and bureaucracies simply aren’t designed to keep up.

Additionally, the lack of faith in institutions is also due to the fact that expectations have changed. People used to a slower paced life might not like standing in line for a government service, but they know that there is, in many cases, no private entity that could accomplish the task. In addition, there experience with the bureaucracy is likely not completely divorced from experiences in other aspects of their lives. With the internet, facebook, online purchases, Amazon, 500 cable channels etc., as well as the ethos that the customer is always right (i.e. have it your way), the one-size-fits-all, slow moving, inefficient, expensive, and often incompetent government service provider stands in stark contrast to the everyday experience of the American consumer. When one considers this, it is no wonder that Americans have lost faith in the ability of the institutions to deliver what is promised.

Finally, there is perception on both left and the right that the game is rigged against the average American. When bankers can engage in illegal and unethical activity and crash the economy, or when the IRS can improperly target some Americans due to their political views, and nobody ends up going to jail, there is a sense that there is one set of rules for the powerful and politically connected, and another set of rules for everyone else. While the American promise was that everyone is equal before the law, that seems to be less and less true.

Going forward, if there is no substantial reform, America will be a different place. Trapped by the battles and institutional structures of the past, she will be unable to win the future (regardless of which political party is in power in Washington). It was the governmental institutions and structures of the past than made people willing to take risks and create global companies, products and technologies that have lifted millions out of poverty and created the most powerful, wealthy society that humanity has ever seen. Without some sort of updating of institutions (and discarding of those that no longer function), America will someday find itself eclipsed by countries whose institutions are more relevant for the the 21^st century.

On this 4^th of July weekend, as we celebrate America’s 238^th birthday, many of us will be visiting friends & family and enjoying some food and fireworks. A few of the more philosophical might spend some time thinking about freedom, perhaps the Constitution, and perhaps be grateful that they live here and not somewhere else. However, I dare say that few, if anyone, will be thinking about economics. And yet, it is the economics that makes America attractive to people today.

Although it may sound sacrilegious to say it, freedom is like air: you only notice it when you don’t have it. A person once told me that most people don’t really care whether they live in a democracy or a dictatorship, just as long as their needs are being met. While we, in America, like to think that people want to come here to be free to say what they think, to vote their conscience, etc. etc., the truth is that the illegal immigration issue that we have is not because people are so desperate to write a letter to the editor that they hire smugglers to get them into the U.S. It is because they want a higher standard of living than they can have in their own countries. To them, it probably doesn’t matter whether America is a democracy, an oligarchy, or is being run by Vladimir Putin, it is substantially better than what they are running from, and that is enough.

However, it is the economic freedom that America won 238 years ago and has developed in the intervening years that has allowed the U.S. to become the economic (and military) superpower that it is today. It is the freedom to develop ones potential to the maximum extent possible, as opposed to having your economic destiny determined by who you your father was, or determined by what those in authority dictate that it should be, that has allowed America to harness the talents of its people (i.e. its human capital) and create unheard levels of wealth. It was economic freedom found in America that allowed a group of college dropouts to create computer companies that have completely changed the human experience. It was economic freedom that allowed Henry Ford to develop assembly line techniques that allowed undreamt of numbers of automobiles to be produced. It was economic freedom that allowed two guys from Ohio to spend their time experimenting with flight and eventually produce the first airplane, etc. etc.

Economic freedom is not only found in America of course. The idea of economic freedom has spread around the world in the last 200 years, and many of the richest countries in the world (i.e. Western Europe) have high levels of it relative to countries that are poorer.  However, in America, the economic freedom ethos is not only legal, but cultural. Economic freedom is not only the freedom to succeed, but the freedom to fail. Economic freedom means that you can try several different paths to figure out which ones suits your talents the best. Economic freedom means that failure in one area does not brand you as a failure for life. Germany is also a fairly economically free country. However, one thing that I learned there as an exchange student at a business school was that trying to start a business and failing would make it very difficult to get a second chance to start another one. The American ethos, on the other hand, welcomes second chances. A failure in one area, doesn’t mean that one can’t try and be successful at something else. I remember an immigrant from India saying to me when he realized this that “I love this country. I can screw up, and it doesn’t ruin my life”. To me, that statement is the essence of economic freedom.

So during this weekend and you drive your car to friends, and enjoy simple things like air conditioning and indoor plumbing, microwave ovens and video games, DVD players and cell phone calls, etc, remember that none of these things would have been possible without economic freedom. Like air, life without economic freedom is very different than life with it.

Over the last couple of weeks, there has been discussion as to whether the funding for the Export-Import Bank should be allowed to expire. While the Chamber of Commerce and other pro-business (and Republican leaning) groups are pushing to renew funding arguing that the bank promotes exports and American jobs, others are arguing that the bank is simply funding transactions for big companies, as well as funding jobs and transactions that would happen anyway, as well as putting taxpayers on the hook should the bank have to take losses.

The fact is that roughly 60% of the bank’s funding goes to 10 big corporations, including such familiar names as Boeing, General Electric, Caterpillar, and Bechtel. Only 20% of its loans go to what it defines as “small” businesses, namely those with 500 to 1500 employees. These numbers contradict the idea that the bank promotes business, but rather confirms the idea that it is a slush fund to promote big (i.e. politically well-connected) business. It is also worth noting the definition of “small” business that Ex-Im Bank uses is somewhat at odds with the definition that the Small Business Administration (SBA) uses, which is that a small business is defined as having less than 500 employees.  As of 2010, the SBA stated small businesses make up 99.7% of all businesses (as of 2010). To put it another way, virtually all of Ex-Im’s funding goes to a category of businesses that make up .3% of all U.S. businesses. That is to say that the bank doesn’t exist to promote exports and American jobs, it exists to promote the business model of large businesses. While a government certainly may want to promote its own businesses, and the U.S. faces competition from countries that do just that, there is a strong case to be made that such actions promote corruption. The fact that 60% of the bank’s funding goes to 10 businesses makes it highly unlikely that the political pressure (i.e. the use of political connections) was not involved.

The second problem is the assertion that taxpayers won’t be on the hook for loans for losses that the bank takes. Firstly, it should be noted that any normal bank that had 60% of its loan portfolio tied up in 10 clients would likely find federal bank regulators possibly moving to have it sold to a larger, more diversified institution. Given that a typical bank only has an equity cushion of 8% to 10%, a loan portfolio with concentrations such as this would likely be in the position that the bankruptcy of any 2 of the 10 clients would put it out of business. While the Ex-Im Bank operates on a different funding model than your local bank that is using Grandma Jones’ life savings, the assertion that taxpayers would never have to cover losses is highly questionable. While one might respond with the fact that Boeing, General Electric, and Caterpillar are big, well-run companies that are not likely to go bankrupt, nobody saw the General Motors bankruptcy coming, nor any of the airline bankruptcies that have occurred, nor any of the banks that were ultimately bailed out, etc. etc. Does anyone really believe that if Boeing, General Electric, etc were to be headed towards bankruptcy that they wouldn’t also be the beneficiary of a taxpayer bailout?

The Ex-Im Bank is clearly one example of crony capitalism that has disgusted large swaths of the American electorate with Washington on both the left and the right. For those on the right who champion free markets, this bank is an example of corporate welfare. For those on the left who denounce greedy capitalist, the bank is an example of the influence of corporate money in Washington that buys favors. In the Wall Street vs. Main Street narrative that has arisen over the last few years, this bank is one more example of how Washington benefits Wall Street at the expense of Main Street.

Certain politicians are arguing that the funding for the bank should not be renewed this year. They should get their way.

Although it could still be revised upward, recent data showing that GDP contracted by a small amount in the first quarter has some questioning whether the U.S. is heading into another recession. While optimists will point to an increasing stock market to assert that business leaders don’t think that a recession is in the near future, pessimists will retort that central bank activities in the stock market mean that it is not as a good a barometer for economic sentiment as it was in the past. In fact, believe in bad economic news can actually be good for the market as traders believe that the Fed will keep interest rates low.

That the U.S. should be close to another recession when more than half of Americans still believe that the U.S. is still in a recession (it officially ended in 2009) is an extremely uncomfortable fact. While it is difficult to predict how long it should be between recessions based on historical data (the postwar period has seen gaps of 1 to 10 years between recessions), usually the majority of the country has recognized that the prior recession was over before a new one was entered into. The fact that more than half (a January, 2014 poll put the number as high as 74%) believe us still to be in a recession means more than that most people don’t keep up with financial news. It means that most people are seeing the benefits of the economic expansion. It used to be said that a rising tide lifts all boats. While that is still true in the natural world, it no longer seems to be true in economic world.

Another recession right now is precisely NOT what this country needs (not that there is really ever a good time for a recession). Another actual recession with its economic pain would further entrench a pessimistic streak that seems to have taken hold, namely that the American Dream is out of reach. One of the characteristics of Americans has historically been that we are optimistic about the future. This optimism has historically fueled the drive to do great things, to build things that were never thought of (the internet), to go places no one had gone before (the moon), and create more wealth and a higher standard of living for more people than anywhere else. A pessimistic America, an America that has less faith in the future, is an America that will be less prosperous and less of a force on the world stage. And that is ultimately not good for anyone.

For a generation, perhaps longer, one of the major political parties in the U.S. has had “cutting regulations” as a standard campaign promise, while the other major political party has touted the benefits of regulation. However, many of those who are making the “we have too much regulation” argument are not really explaining why that is a problem, as if they consider it to be self-evident. Their lack of willingness to explain themselves means that what most voters hear is that too much regulation is something that business owners, not people like themselves, should be concerned about. In other words, most voters don’t necessarily connect excessive regulation with economic stagnation.

So how does excessive regulation rob a country of economic dynamism and result in economic stagnation? While history is littered with such examples, this is not a good explanation as it does not explain HOW the process works. The way regulations impact economic growth (and through this living standards) starts with what a regulation actually is. A regulation is a command for someone (or some entity) to do something that they would not do of their own free will. This means taking time, energy, effort and money to accomplish some task that is being done under duress. Because this regulation is mandating an action that is not being produced on its own in the market, the resources being expended are not necessarily being used in an “economically productive” manner. While it is certainly possible that the regulation in question is actually correcting a market failure (i.e. accomplishing an economically productive task that the unique market conditions at a specific place and time are hindering), the fact that regulations are being imposed and administered by people with neither the information (markets are way too complex and contain way too much information to be managed efficiently by humans), expertise, or often interest to manage markets means that it is not likely that most regulations that are proposed and administered are going to be of the market correcting sort.

The second problem with regulations is that they often create a situation in which people who spend their lives doing certain tasks are being overseen by people who have no experience doing the tasks that are being micromanaged.  It is hard to imagine a worse way to organize an economy than one in which those who know are forced to, in a sense, answer to those who don’t know. Furthermore, the people who are paid to manage the regulations (including people who are employed by private companies to ensure that those companies are in compliance with the regulations) are engaging, in most cases, economically unproductive activity (except in those cases in which they are managing regulations that are correcting a market failure).

Take the IRS as an example. The purpose of the IRS is to move money from Point A (taxpayers) to Point B (government). Every year, Americans spend over $100 billion dollars complying with the tax code. It would be possible, with elimination of income tax and its replacement with a national sales tax, to move the same amount of money to the government, with relatively little cost. In other words, the IRS and the armies of accountants, tax preparers, tax lawyers, etc. etc. are engaged in the economic equivalent of digging a hole and then filling it in. They add no additional tangible products to the market. They are effectively involved in a large federal jobs program. We would have the same level of economic production (industrial products, agricultural products, standard of living, etc) if they all went home and had their checks paid by the people who are actually engaged in economically productive activities. Economically, they are no different than welfare recipients, which certain segments of the political culture tend to disparage.

In short, as more and more regulations are created, more and more economic resources and workers are pulled into economic unproductive activities, which creates a drag on economic dynamism that slows (and in extreme cases stops and/or reverses) the growth of living standards. While there can be disagreement at which point one can say that there is “too much regulation”, there can be no serious disputing that this point exists. The sluggish economic growth of the last 5 years, when compared with economic recoveries of a generation ago, indicates that we are likely operating in a “too much regulation” environment.

Globalization isn’t a choice. It’s a reality-Thomas Friedman

About a decade ago, the author and New York Times columnist Thomas Friedman wrote a book called The World Is Flat in which he argued that globalization was upon us, driven by technology, and was not even something that we could choose any longer. Although Friedman was correct in that globalization is here to stay in the same way that indoor plumbing and electricity are here to stay (i.e. the technology that makes globalization possible isn’t going anywhere), he is likely incorrect in his implication that people won’t have anything to say about it.

In the last decades, trade has become freer and goods have flowed across borders raising living standards around the world (just as economic theory predicted). The rise in living standards had, for a time, muted concerns about the disruptive effects of globalization. While there were always losers in globalization (think manufacturing workers whose jobs were outsourced, or low skill labor that saw immigrants (legal and illegal) driving down wages), those losers were dwarfed by the number of people who saw their living standards increase. Consequently, societies in the West were willing to go along with the elites whose views were that what is good business (free trade & globalization) is good for society as a whole. That was the case that was being made, and for most Western societies, their rise in living standards seemed to confirm that.

However, since the financial crisis, the case that free trade and globalization is good for everyone doesn’t seem as obvious as it used to. Economic growth is sluggish, and unemployment, while falling, doesn’t seem to be falling fast enough for people to believe that we really are out of a recession. And given that it has been 5 years since the recession officially ended, the likelihood that we will see another one before too long is increasing. In Europe, the thing that European voters were promised when they signed on the EU, namely that it wouldn’t simply be a mechanism for Northern Europeans to subsidize Southern Europeans, appears not to have been the case. In elections, populist parties of the right and left are gaining ground as the ranks of those marginalized by globalization grows. At some point, the pressure for the elites to embrace policies that reverse some of the free trade and engage in some form of economic nationalism will become too great, and some of the economic gains that have been achieved will likely be given up.

This is not to say that we won’t still live in a globalized world when compared to say, the 1950’s & 60’s. However, many of the policies that have been adopted have disrupted the lives of ordinary people. Whether the National Front in France, Party for Freedom in the Netherlands, The UK Independence Party in England, or the Tea Party in America, people who feel marginalized by globalization are finding their voice and impacting their societies in ways that will in some way change the trajectories of those societies. While they likely won’t reverse the general economic direction of their societies, they will insure that the globalization of the future will be a modified sort relative to what we have seen up until now. The “Golden Age” of globalization may be coming to an end.