Donald Trump has asked Elon Musk and Vivek Ramaswamy to lead what is basically an audit of the entire US Federal Government. There is much consternation about this in the expected circles - no doubt due in part of the proclivity of Musk and Ramaswamy to stir the pot and troll their opponents.
I mean, the Department of Government Efficiency? D.O.G.E.? Srlsy?
Fun and games aside, this is a really important project. It's not just that Elon says you can reduce the Federal budget by $2T/year - nice though that would be. Instead, it circles back to something that Trump has been talking about for years. Remember him asking
why we can't get a growth rate of 4%?
I wrote this a long time ago, and updated it 6 years ago for the age of Donald Trump. I think that it's even more important today, with D.O.G.E. explicitly intended to address the issues I called out.
(last ported 2 January 2018)
Why Donald Trump will transform America
Donald Trump understands something that nobody else knows, and he is
doing something about it. If he accomplishes what he is setting out to
do, it will completely change America. To understand what this is, we
need to look at what's changed in the past few decades, and before.
Something unprecedented happened during the eighteenth century,
something that is a sharp dividing line between the modern world and
what came before. The
Industrial Revolution transformed first Britain, then Europe and the United States, and then the world.
It started with cloth making, where initially water power drove a set of
rapidly evolving machine types that made cloth literally thousands of
times easier to make. Prices plummeted, and consumption rose by a factor
of 12 between 1770 and 1800. People's lives began to change, as now
underwear was affordable to more than just the wealthy.
Then came steam and iron. James Watt invented the first really
successful steam engine, but it was only unleashed when Henry Cort
approached him with a "grand secret". Up until then, Iron was
frightfully expensive, because manufacturing basically had to heat the
molten ore until the slag floated off. Cort had figured out how to use
Watt's engines to drive huge hammers to beat the slag out of the metal.
He could make fifteen tons of wrought iron in twelve hours. Iron
production soared by a factor of 150 between 1740 and 1852. The price of
iron plummeted, to the point where it
entirely changed architecture.
Something was in the air - creativity had been unleashed, and continued
in the nineteenth century, infecting industry after industry: Bessemer
and Steel, Tennant and industrial chemicals (chemicals manufactured in
ton weights, like chlorine bleach), railroads, electricity, internal
combustion, aviation, the communications revolution of
telegraphy-radio-television-Internet.
What was striking about this was that each industry would exhibit
precisely the same growth characteristics. The "S" curve described a
slowish initial takeoff, an exponentially rising growth period, and then
a slow tailing off. All of these industries followed it in turn:
cotton, iron, steel, railroads. What was key to the miracle that
occurred between 1720 and 1990 was that as one reached the top of the
curve and began to falter, a new industry emerged to drive things
forward. Income per capita went from around $450 in what would become
the United States (in 1700) to $18,300 in 1989.
In many ways, this seems to be spinning down. More and more industries
seem to be in the top flat part of the curve. Fewer new industries are
emerging with robust growth to pick up the slack. People look towards
the future and do not see a doubling of real per capita national income.
We are told that the people are ignorant, and aren't smart enough to
know what they're talking about. We're told this by an Educated Class
with complex computer models of the financial system. We're asked, what
do the hoi poloi know of the grand sweep of the world economic system?
I think that the feeling of dread is well justified, by a good view of
the forest rather than the trees. And after all, the financial models
didn't predict the 2008 collapse or the stagnation that followed, so a
little more humility might be called for. But in general, the critique
is correct - people don't know what's causing this, just that they're
unhappy. They see a change, which makes them unhappy. They don't know
the cause.
Immodestly, I would like to say that I think that I do. It's related to
the size of government, but the usual arguments over which side of the
Laffer Curve we're on, or what the optimal rate of marginal taxes are
pretty much beside the point. Something is slowing the system down, and
it's not the 35% that the Fed.Gov takes off the top (OK, a little, but
that's a second order effect).
Let's think about fast and slow. The Empire State Building was built in a
little over 15 months. The World Trade Center (Tower 1) took 52 months,
and that was in 1970. Most recently, One World Trade Center took 7
years to complete. We're slowing down; we're not as good at what we
used to do.
The reason for this is regulation (and its bastard child, litigation).
That's the problem. We have buildings full of people that make us stop
what we're doing, fill out forms in triplicate, and then wait months or
years before we are allowed to pick up where we stopped. Think for a
minute what this does. It pushes some of the middle of the S-Curve into
the flat part, reducing the overall value of the industry, as resources
get sidelined instead of being engaged in production. More damagingly,
it pushes the next S-Curve to the right, increasing the time that it
takes to bring a new industry online. Most damagingly of all, it
possibly completely eliminates some S-Curves from appearing at all,
because the risk is too high to attract investors.
It's not the tax rate, it's the
regulation rate that's making the
economy run down. Sarbanes-Oxley, passed in great haste after Enron's
collapse, has all but destroyed the high tech IPO market. Think of that
as S-Curves that never came into existence.
The Silicon Graybeard posted about this 7 years ago:
Although
the legislators and regulators never consider this, every regulation
consumes some amount of time and money to comply with. The new Finance
Reform bill has been estimated to required the development of 250-300
new regulations. Every regulation slows down, hinders and costs every
honest business real money. Despite the widespread talk of corrupt CEOs
and general lack of corporate ethics, I've been working in the
manufacturing industry since the mid 1970s, and every company has had an
active, if not aggressive, ethics compliance program with requirements
for training and seminars every year. There are exceptions but most
companies do their best to be honest and law-abiding. Government seems to think it's mere coincidence that
countries with lower tax rates and lower regulation attract business,
and they demonize companies for moving to countries where the
environment is better.
As SiGraybeard points out, Big Business excels at managing the top end
of the S-Curve, and they have big offices capable of dealing with the
paperwork. Big Business doesn't mind regulation - in fact, if you
believe (as I do) that
Regulatory Capture is the equilibrium state of any government agency,
Big Business uses regulation to hobble small but dangerous competitors.
They get the Fed.Gov to do their dirty work, while they extract maximum
value from the end phase of their old products. We pay for that in
higher prices and lack of better alternatives.
Scale this up to cover the entire economy, as the government has tripled
in the post war period, and it becomes obvious why we can't build
skyscrapers any more. They don't seem to have trouble with this in Dubai
- it's
us that keeps us from doing it.
Regulation stifles innovation - quick, name the last revolutionary
program that came out of the Department of Education. That effectively
transfers wealth from future generations (our children and
grandchildren, who will have lower standards of living). The recipients
of that transfer are government employees - those folks that read and
file your application (in triplicate) and the Big Business that captures
the regulatory agency.
We have made so many layers of cruft - allowed so many barnacles to grow
on the bottom of the ship - that we're noticeably slowing down. People
feel it. People are nervous, because they think it's going to get worse.
And while the recent Congresses and the Obama Administration poured
gasoline on that flame with Health Care "Reform" (written by Big Pharma,
the Insurance Companies, and the AMA), I'd like to point out that the
Republicans ran Congress and the White House when Sarbanes-Oxley passed.
One way to look at things is that it's been a good long 300 year run.
Too bad it's over, nothing lasts forever. Get used to stasis, with fewer
and smaller S-Curves, and get used to declining living standards as Big
Business and a bloated government take ever more from National Income,
immizerating the masses.
A different way to look at things is government regulation didn't give
people affordable underwear, or bleach to keep them clean. Get out of
our way, and we'll do it again. The tax rates are annoying, but the
buildings full of fussy balls-and-chains telling us that we'll hear back
from them in 3 to 6 months are infuriating.
This is what Donald Trump knows. He knows that there are winners
in this game - the Ivy League, the Non-Governmental Organizations, "Big
Green" (The Sierra Club, Friends of the Earth, Greenpeace). Trump
knows that they all hate him, and are engaged in a scorched earth
campaign to destroy him. He also knows that the losers in this game are
the working classes, who vote for him.
So what do you think is his motivation? Is it to change governance to
unleash economic growth, rewarding his supporters and humiliating his
opponents? Or is it to fade quietly into the background, sitting in the
corner and thinking about his many failings? To ask the question is to
answer it.
This is the big thing that Trump knows that nobody else does. It's a
big idea, which seems to be how he likes to think. It's transformative.
So far, he has quashed nearly 2000 regulations in his first year, and
seems only to be getting started. And all the geniuses who hate him are
so focused on his tweets that they have no idea what's hitting them.
Note: This post is based on
one I did 7 years ago. It's taken this long for a politician to come on the scene who looks like he wants to do something about it.
UPDATE 2 January 2018 22:17: Even the New York Times recognizes
this in an (inadvertently) hilarious story. It would take a heart of
stone not to laugh at their attempts to spin soaring business confidence
due to reduced regulation under Trump. Almost every person quoted is a
former Democratic administration aparachick, and there are precisely no
quotes from business leaders who think that reduced regulation helps
business expansion, hiring, and wage increases. And
there's this, of course:
There
is little historical evidence tying regulation levels to growth.
Regulatory proponents say, in fact, that those rules can have positive
economic effects in the long run, saving companies from violations that
could cost them both financially and reputationally. Cost-benefit
analyses generally do not look just at the impact of a regulation on a
particular business’s bottom line in the coming months, but at the
broader impact on consumers, the environment, public health and other
factors that can show up over years or decades.
Oooooooh kaaaaaaay. [rolls eyes]
