In Part I we defined impaired assets and posited that the United States could be compared to a corporation so burdened. Has ill-advised investment in multiple critical areas led US INC to be over-indebted with too limited income to repay that debt? If the answer is yes, it also leads to other impediments to a genuine economic recovery.
Impediments to Economic Recovery
- Discouraging savings – Productive enterprise springs from investment. Investment is predicated on a pool of savings to tap. Zero interest rates and high taxes impede savings and investment.
- Workplace regulations – We have overregulated the workplace. Worker protections have been taken to an extreme. We protect workers against a myriad of discriminatory behaviors: race, age, sex, national origin, pregnancy, gender, disability, union membership, marital status, veteran’s status and others. While all noble goals, fearing expensive litigation, companies build costly compliance complexes and hesitate to discipline or discharge a poorly performing employee because of their protected status.
- Environmental regulations – While initially a worthy goal, the overlapping state and federal (EPA) enforcement regimes and expensive compliance impose significant costs on American companies. Foreign competitors face little pressure in this area and thus enjoy a competitive advantage.
- Unionization – Through a myriad of seniority and work rules, breaks, and generous wage and benefit demands, unions impose a significant employer expense. These limit employer flexibility to respond to changed economic conditions. The Administration has an avowed policy of trying to make unionization easier.
- Litigation – Besides employment, environmental and labor litigation, employers face significant litigation risk in product liability and securities areas. States with pro-plaintiff orientations have encouraged expensive and prolonged class action litigation.
- Public Sector – Expanded public sector employment creates a dual problem. First, the private sector is at a competitive disadvantage competing for talent against the higher paid, secure employment in the public sector. Second, an expanded public sector imposes greater tax burdens across all levels of government, all of which costs are ultimately levied against private enterprise.
- A Culture of Entitlements – Public policy over the past seventy years has built an expensive safety net of personal entitlements: social security, Medicare, Medicaid, unemployment, disability insurance, family leave, medical leave and others. The Obama health care initiative only adds to these burdens.
The US is much like the mid-1990s telecom environment. We are burdened by too many legacy costs. We have too much debt, overvalued assets and insufficient income to pay back our debts or support our regime of entitlements and regulatory burdens.
Solutions
Technology and poor economic policy have earned US INC the dubious status of impaired asset. One way the markets have been expressing this concern is through the decline of the dollar. Moving up the economic chain, the next move would be for foreign governments to refuse to purchase US Treasury securities.
Looking at government attempts to export our way out of this problem through depreciating the dollar, Doug Noland of Prudent Bear comments:
Having de-industrialized and failed to invest sufficiently in productive capacity during our prolonged Credit Bubble, there will be no near-term exporting our way out of trade deficits. And there is little evidence that help is on the way from the current elixir of massive non-productive government debt expansion and ultra-ultra-loose monetary policy. While extreme government stimulus has stabilized incomes, consumption and imports, it has done little to promote the type of productive investment necessary to rebalance our maladjusted economy. See Rebalancing the World
It is time to end extend and pretend. If US INC was subject to private business accounting rules, the banks would be forced to write down their “assets” (loans) to fair market value. Yes, this would involve hardship upon the equity and bond holders of banks. But failure to remedy this problem will only prolong the economic agony.
Further, any good business person would look at the cost side of the enterprise and try to reduce expenses. We probably have gone as far as we can in cutting employment expense through layoffs. We need to move up the chain to look at societal costs being imposed on business. We are not about to throw out all environmental, workplace and other protections However, we need to see how a more sensible regulatory scheme could reduce costs and minimize employer litigation costs. Further, public policy needs to reduce public sector employment numbers and cut back entitlements.
We need to take these steps before our foreign investors and competitors impose them upon us.
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