Shrinking Economies Deserve Gridlock

Growth solves a multitude of economic sins.  So what prevents countries from encouraging growth?

  • Cronyism
  • A shrinking population, or something near that.
  • Too much regulation that affects production or hiring.
  • Cultural decay.

When economies stop growing, factions argue over their slice of the pie.  Gridlock ensues, and nothing good comes of it.

I wish I could be more optimistic here, but the world works better amid growth, but the policies of our governments suppress that.

A large part of this says don’t press your own agenda, it is not good for everyone else.  A freer economy creates more growth, freedom promotes opportunity.

But an economy where taxes are regular and predictable promotes growth also — corporations can plan for the longer-term, and not worry that current investments might earn less from higher future taxes.  Businessmen want predictable future taxes, which is one reason why a budget that is way out of balance concerns them.

Politicians do better with a rapidly growing economy because their revenue base allows them flexibility, because taxes received will rise without government action.  To them, the growing economy is magic — the gift that keeps on giving, but they have no idea what affects it.  They want to see the economy grow, aiding their efforts, but they engage in all manner of regulations that reduce growth.

The back-and-forth on issues like this produces gridlock, where deficits persist, amid growing needs elsewhere, and constrained taxes. I don’t see how 15% of the US states escape bankruptcy, even though they can’t do that.  There will be many significant fights over employee benefits in the states over the next 20+ years.  Only when we get past this black hole will growth revive.  (Add in normal monetary policy as well…)

About David Merkel 145 Articles

Affiliation: Finacorp Securities

David J. Merkel, CFA, FSA — From 2003-2007, I was a leading commentator at the excellent investment website RealMoney.com (http://www.RealMoney.com). Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and now I write for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I still contribute to RealMoney, but I have scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After one year of operation, I believe I have achieved that.

In 2008, I became the Chief Economist and Director of Research of Finacorp Securities. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm.

Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life.

I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

Visit: The Aleph Blog

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