The Interventionist State
Our age is remarkable in many ways. The average citizen can no longer really tell whether he is getting richer or poorer. In many areas of life, material wealth seems to be on a downward trajectory, as the inflationism of the past several decades has lowered the purchasing power of the incomes of the majority of the population. The common man is faced with soaring costs for education, health care (in the form of sharply rising insurance premiums), shelter (both home prices and rents are - with hiccups due to the bubble that burst in 2008 - inexorably rising), food and energy (the two famous 'non-components' of the official inflation measures) to name but a few. The rise in the cost of these necessities of life has vastly outpaced the rise in the real incomes of the middle and lower classes.
Meanwhile, the policy of continual money supply inflation has redistributed wealth from the poor and the middle class to those who are already wealthy: the richest 10 or 20% of the population, who are the main owners of assets such as real estate, stocks, art works, collectibles, and so forth. The everyday items listed above may well eat up 70 to 90% of the income of a middle or lower class wage earner, but they represent a tiny proportion of the income of someone who is rich. What the rich gain in terms of soaring asset values far outpaces what they lose in purchasing power.
This is not to argue that the rich are responsible for the fact that inflationism has become so entrenched. They have almost no influence on this process and it is a good bet that most of them do not even understand the process or are even aware of its existence beyond a vague sense of suspicion. Rather, inflationism has become the accepted religion of modern-day mainstream economics. It is regarded as a panacea for economic ills by the monetary bureaucracy and a whole class of hangers-on who are constantly demanding more easy money. It is seen as the cure-all for recession and depression, even though its repeated application makes things progressively worse over time. We do not even have to assume that those empowered to make the decisions have anything but good intentions (admittedly, this assumption requires a leap of faith. That we are ruled by angels driven by motives pure as white snow is rather unlikely). In many cases their intentions are probably honorable though - they want to improve the economy, lower unemployment, and so forth. And because inflation always makes it appear for a short period of time as though things were getting better (see this article by Robert Murphy on 'Abenomics' for a glaring recent example), the erroneous belief that it can 'fix' the economy has become deeply entrenched. Ironically, the self-anointed champions of the poor and downtrodden (many of whom are personally members of the 'rich club', such as e.g. Paul Krugman), all vociferously argue for more inflation, even though it impoverishes those they purportedly want to help.
Inflation is only one aspect of the disease of modern statism. The other aspect is the growth of the State in all other areas of life, specifically in terms of regulations and taxation. The growth of the regulatory Leviathan is slowly but surely undermining the very foundation of civilization, as property rights are becoming more and more insecure. Since interventions almost invariably breed so-called 'unintended consequences', the representatives of the political and bureaucratic classes constantly need to make new choices, either in the direction of repealing the interventions that have so clearly produced failure, or incrementally adding to them in an attempt to 'fix' their shortcomings. Since bureaucracies have an innate tendency to continually grow in extent and power, additional interventions are almost always the path that is chosen. Large established corporations meanwhile find it far easier to handle more onerous regulations than small ones and upstarts, and so they are often supporting the growth of the regulatory State as a means to destroy competition. This has led to the emergence of what one could term 'fascism lite' in the modern regulatory democracies, in which the representatives of the largest corporate interests and those administering the State are banding together to write rules that crush competition and genuine economic progress.
Some Effects of Interventionism
Above we mentioned that the average citizen no longer really knows whether he is growing more wealthy or getting poorer. This is because there are also sectors in which the economy is only very lightly hampered, so that it continues to 'deliver' as it should. These are especially the sectors in which the pace of technological progress is so fast that the bureaucracy is simply too slow to apply new regulations at the speed that would be required to gravely impair the functioning of these areas of the market economy.
Actors in the private sector are well aware that their property rights are increasingly endangered in sectors of the economy over which the regulatory apparatus has fully established its dominion. We can directly observe the effects in the stock market. As an example, consider the shares of marginal (relatively high cost) coal mining companies, an industry the current administration has practically sworn to destroy. Owners of stakes in this industry know that their property rights have become quite tenuous - more so than ever before. Consequently, many of them have decided to remove their capital and the stock market value of many of the companies concerned has collapsed.
Marginal coal producer Arch Coal (NYSE:ACI). Not even the decline to the secular cycle low reached at the end of a 20 year long bear market in commodity prices was as devastating as the recent collapse. Keep in mind that in real, inflation-adjusted terms, the recent trough was far lower than the low recorded in late 2001.
It is not the first time that the price of coal has declined. And yet, in the past the shares of marginal coal producing companies have never been obliterated to a similar extent. This was so because market participants always regarded downturns as cyclical. Hence they accorded a valuation to the underlying assets that seemed relatively high compared to recent earnings, expressing the expectation that the next cyclical upswing would restore the earnings power of said assets.
What is different this time is that far more onerous environmental legislation has greatly impaired the competitiveness of coal as a fuel for power generation. This has been done in the context of a meme ('global warming') that is heavily propagated by the elites and that is certain to waste untold amounts of scarce capital. The market's ability to discover knowledge through the price system is increasingly impaired, while at the same time, subsidies are showered on countless endeavors that are clearly uneconomic (they would not require subsidization if it were otherwise). Why risk such impoverishment? It is not the result of a genuine desire to 'save the planet' (if you believe that, we have a bridge in Brooklyn to sell). The reason is that this particular meme allows regulations and economic control to be expanded almost willy-nilly over countless spheres of economic activity. Meanwhile, for the rent seekers nearest to the government's trough, it is-- of course-- a veritable gold mine.
We don't want to go into the merits of the AGW theory here - we have discussed the topic extensively on a number of previous occasions. Allow us just to mention again that there has been no 'warming' for 17 years running. The fast growing ice sheets of the Antarctic have just entrapped a bunch of warmists on their research vessel in such thorough fashion that it proved impossible to free the ship with icebreakers (several attempts to do so have failed). In the end, they had to be rescued via helicopter. The irony is delicious. Oh, and in Winnipeg it is currently as cold as on Mars.
On the other end of the spectrum, the shares of technology companies have been soaring. The enterprises perceived (rightly or wrongly) to be on the cutting edge of progress such as e.g. the highly popular social media companies, increasingly reflect bubble conditions as more and more capital is thrown at them.
YELP - a company that has no earnings and hence no P/E ratio. Its soaring share price has given it a market capitalization of about $4.4 billion. Its revenues are slightly over $200 million and its operating cash flow is a little over $13 million. We are not trying to pick on YELP specifically - it merely provides a good example.
Leaving aside for the moment that the sector of course also reflects the effects of the huge monetary inflation that has been underway over the past five years, capital is drawn toward technology precisely because it is the one sector in which economic actors perceive the risk to their property rights to be relatively small. It is also a sector of the market economy that clearly continues to produce rising real wealth for the average citizen.
Useful gadgets such as smart phones, tablets, powerful personal computers, gorgeous television screens, the vast offerings of the internet which are practically available for free (one has to pay for access to the internet, but the great bulk of the content is free), and so forth, are available at incredibly low prices and have enriched everyone's lives. One cannot stress enough to what extent this is a result of the fact that the State has been unable to smother the technology sector with regulations - mainly because the sector is moving too fast. It even manages to escape the effects of the inflationary policy enacted by central banks to some extent, in the sense that its productivity growth is faster than the pace at which money is debased.
The technology sector's progress has also produced noticeable effects in other parts of the economy's production structure. Everything from production processes to supply chain management has benefited greatly from computerization, and these productivity gains have in turn benefited consumers by counteracting the effects of the constant devaluation of money.
The situation unfortunately also furthers the emergence of a bubble. On the one hand, we have the fact that inflation and the resulting speculation tends to increasingly distort prices both in the capital goods sector and in the stock market, which will inevitably produce large losses at some future date (actually, the losses are in a sense already being produced - it is mainly the unmasking of this fact that will arrive at a later date). On the other hand, the rising productivity of manufacturing provides monetary policy makers with the fig leaf they need to pursue a highly inflationary policy, at least as long as they can point to the fact that price indexes remain tame. The distortion of relative prices in the economy obviously doesn't figure in their decision making.
As an aside to all this, a number of U.S. technology companies are likely to suffer from the recent revelations regarding the NSA's ubiquitous surveillance. Since there is growing suspicion that the agency has managed to install 'back doors' in numerous software and hardware products made by U.S. companies, they are increasingly likely to experience a slump in foreign sales. In other words, even the technology sector finds itself suddenly exposed to negative effects from Leviathan's growth.
It is only natural that investors and entrepreneurs considering the menu of choices before them will react to the incentives that the growth in regulations produces. The fact that the deployment of capital is increasingly influenced by the effects of regulations on the profitability of market sectors and the perceived security of property rights can, however, only produce outcomes that are radically different from those that would be produced in an unhampered free market economy. Such outcomes must necessarily be less than optimal in terms of smooth economic development.
The growth of the State and its diktats is also directing the energy and efforts of economic actors into a plethora of wholly unproductive areas. For instance, a veritable army of people is continually busy figuring out how new regulations can be circumvented, what loopholes there are and what must be done to exploit them. The results of these endeavors benefit consumers, as they help to maintain profit margins and much of the cost savings achieved will tend to be passed on. Obviously though, it would be far more conducive to economic progress if it were not necessary to devote so much effort solely to circumventing regulations hampering the market.
Lastly, the inexorable growth of the body of regulations has produced passivity and resignation on the part of its victims. The incremental growth in regulations is often seen as 'manageable' by both perpetrators and victims, because it is most of the time relatively small compared to the already existing regulatory framework. And yet, with the exception of the occasional step back in selected areas, we are moving ever further away from an unhampered market economy and closer toward a collectivist dispensation. In some countries, like France, the negative effects of this process have become so large that the economy has seemingly embarked on an unstoppable retrogression (see e.g. this recent update on euro area manufacturing data by Mish).
We have only touched on a few slices of the topic in this article. There are many more aspects worth considering and we will occasionally add to these observations in upcoming articles. Some related information can be found in previous articles such as our good-bye to the Daily Bell (which was premature, as it has in the meantime returned) and the article 'Wealth Creation and the State'. The main question is whether Mises will eventually be proved right regarding his contention that the so-called 'third way' or 'mixed economy' is just as certain to be doomed to fail as full-scale socialism was.
We tend to believe that he will turn out to be correct, even though there is the occasional attempt to reduce government intervention in the economy (as for instance during the Thatcher era in the U.K.). Also, there is evidently still enough genuine wealth creation that is so to speak 'buying time'. These small steps back have, however, done little to stop the overall trend. Obviously this cannot continue indefinitely. The more property rights are undermined and the greater government's share of the economy becomes, the closer we will come to the point of crisis.
Charts by: BigCharts
Disclosure: No positions