America's Frozen Economy

Obama has made us a banana republic.

The Great Obama Recession, we are told, ended some months ago.  Unemployment has remained roughly stable and corporate profits are up.  Time to celebrate the beginning of the recovery!

It certainly doesn't seem like recovery down here on the ground, though.  Unemployment hasn't gone up much recently because as quickly as people lose their jobs, the same number of people realize they haven't even gotten a job interview in years and give up looking.  If you don't think you'll ever find a job, you aren't counted in unemployment statistics; perversely, this means that the worse the job market is, the better the unemployment stats look.  Is this institutionalized spin or what?

Corporate America, though, is living a schizophrenic life.  According to the quarterly reports, the total amount of corporate profit has now exceeded profits from before the recession.  Established companies haven't yet made back all the money they lost but they're well on their way.

Employment stats could hardly be more different.  The number of jobs at least isn't decreasing by much, but even when it grows it does so more slowly than the number of new entrants to the job market by school graduation or fresh layoffs.  We're losing ground with respect to employment, not gaining it.

How can this be?  If companies are making pots of money, why aren't they hiring people so they can make even more?

The answer is as simple as it is frightening, and responsibility for this damaging situation lies squarely with the White House and Congress.

Stability and Predictability, Watchwords of Investors

Our politicians often speak of corporations and "the rich" as if they possess a magic wand; they need only to wave it, and unlimited jobs and incomes are created just waiting to be taxed.  Reality is vastly more complex.

Consider building a new factory to manufacture widgets.  Normally you'll already have much of the needed money available from investors and you borrow the rest from a bank.

What makes you decide that you want to build the factory at all?  Simple: you expect the new factory to earn you more profit than just leaving your money in the bank collecting interest.

How do you know if that's true?  How do you winnow through all the things you could do and identify the possibilities which offer the most profit?  Before making any investment, a businessman calculates the expected cost to start up, the expected operating costs, revenues he thinks he'll receive, and thus figures out the likely profit.

None of these factors are known for sure but they can all be estimated.  We can figure out what the land will cost; what the contractor will charge to put up a steel building; how much the machinery will cost, assuming it's fairly standard.  Then, we can estimate the types of employees required to run the factory and what they will demand for pay.

If we're already interested in the widget industry, we know what widgets are made out of and what we can sell them for.  Then you add in estimates for the overhead and utility items like taxes, insurance, the electric bill, and so on.

Some of these items will come in higher than expected, some lower, and there's always something unexpected that you did not anticipate; any business plan includes a suitable fudge factor.  Taking everything into account, the numbers have to add up and show a profit or else the investment won't happen.  No factory, no jobs, and the money stays in the bank instead of generating economic activity.

Obama the Anti-Investor

What has the Obama administration been doing to make potential investors comfortable with betting money now to get more money later?  Let's look at the record:

With Obamacare, we now have a new requirement that employees be provided with health insurance or that large fines be paid to the government.  Insurance costs have been rising at twice the rate of inflation; the government is constantly requiring that more things be covered which drives up the price yet more.

Obama has said that costs will go down, but that's demonstrably false - AT&T reported that a three-line section of the Obamacare law was going to cost them alone a billion dollars next year.  Obviously, costs like that are much more likely to destroy entry-level jobs than to create them.

How about regulations?  Compliance costs can be astronomical, as BP has discovered, and until the regulation is in place you have no way to know what the costs will be.  Obama has clearly expressed his belief that American companies are grossly under-regulated; nobody knows what's coming down the pike but everybody knows that it won't be good.

The worst potential cost of regulation isn't the direct cost of compliance; it's the delays and uncertainty in obtaining newly-required permits.  For a bureaucrat to deny a permit costs him nothing, but by delaying operations indefinitely, red tape can easily make the difference between a profitable operation and a loss-making one.  We don't even yet know exactly what caused the BP disaster, but Obama's moratorium on drilling has devastated hundreds of thousands of jobs and companies who never spilled a single drop of oil.

Regulations have a powerful effect on making local housing unaffordable for ordinary people.  The same is true everywhere else the government's regulatory tentacles reach.

Then there's energy.  Almost every business uses energy, some a whole lot of it.  Even before his election, Obama made plain his intentions:

Under my plan of a cap and trade system, electricity rates would necessarily skyrocket.

If Mr. Obama himself admits that the costs would "skyrocket," the wise investor will take him at his word and make allowances for massive price increases on his factory's electric bill.

And it wouldn't be a Democratic administration if there weren't tax increases on the table.  Traditionally, corporations that don't make a profit don't have to pay taxes on their income, but the Obama administration isn't targeting corporate income taxes.  Instead, they are talking about a value-added tax (VAT), a hidden sales tax on everything.  By definition, this will raise the costs of every input to the business from pencils to payroll.

The conclusion is very simple.  Everything that affects a business will cost more, be delayed, be made more difficult, and be vastly more uncertain by the specific actions of the Obama administration.

In such a situation, you'd have to be a fool to invest money in a new factory that might never be allowed to open, or might never become profitable, or might be shut down on the whim of a bureaucrat.  Far better to keep your money in the bank where it can be whisked elsewhere if need be!

Sovereign Risk: Not Just for Banana Republics Anymore

All these issues look like economic ones, and they are in the sense that you can put dollar values on them, but fundamentally they have nothing to do with economics.  They're purely political.  The businessman of today can't afford to concentrate on running his business; he has to worry about what the government might do to destroy his business overnight.

That is not supposed to be the job of a businessman, and in a free country, it shouldn't be necessary.  International businessmen are very used to worrying about such things; it's called "sovereign risk," and they worry about it in Third World countries like Argentina and Venezuela.

In Venezuela, the government decided that it didn't like the way banks were handling loans, so it devalued the currency overnight but forced loan terms to remain the same.  In effect, that confiscated half or more of bank assets or of anyone else owning financial instruments.

Just like Mr. Obama, Hugo Chavez has made quite the habit of confiscating the businesses of people who offend him from TV stations to hotels.  Mr. Obama has given his confiscations the color of law by bending the bankruptcy rules, but so did Mr. Chavez at first.

In response, Venezuela is not exactly rolling in either investment or jobs; nor, sadly, is the United States.  Venezuelans are suffering from rolling electric blackouts; so will we if the Obama Administration has its way.

Yes, you can buy insurance to cover sovereign risk.  But it costs money!  For many lifetimes, investments made in the United States haven't needed to worry about sovereign risk; now they do.

The hallmarks of banana-republicanism - uncertainty, confiscation, and looming poverty - are upon us.

Petrarch is a contributing editor for Scragged.  Read other articles by Petrarch or other articles on Economics.
Add Your Comment...
4000 characters remaining
Loading question...