Tuesday, January 2, 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]

12 comments:

c w swanson said...

Now, couple that with lower taxes, limits on litigation, and a generally supportive attitude towards business, and you might just get that economic boom.

waepnedmann said...

As Tam sez: "Borepatch...he's got the smahtz."

Thanks.
Your analysis of our situation brings clarity.

12Paws said...

I'm an old gramma--but I get some of this--post this on Facebook--more voters need to read this.

Gorges Smythe said...

I think you've got it.

HMS Defiant said...

And so it is easy to see why business lobbies legislators and is willing to pay to play. The rule makers are getting in the way in the very worst ways they can imagine.

Borepatch said...

12Paws, thanks. This was a long post, but it seemed important. Post away.

Daosus said...

The effect of bureaucracy and regulation on economic productivity is well known in historical circles. I remember a Chinese history class, where the professor stipulated that a big reason for the dynastic upheavals every 200-300 years is that the old dynasty became so weighed down that it was unable to be productive. A new dynasty challenged them, defeated them, and eliminated most of the regulation and bureaucracy.

Of course, they had to give their relatives, and the relatives of the Empress titles, positions, and government posts to gain their loyalty. This would continue until the cycle repeated itself.

In short, I think you're spot on.

SiGraybeard said...

Thanks for the references. I think the post you based it on is one of my all time favorites - as is the one I wrote, to be honest.

I got a Trump email not too long ago that said he had promised to delete two old regulations for every new one, but that the agency heads he had put in place are deleting 20 regulations for every new one. I wish I could verify that somehow.

But the fact that over 700 EPA employees have left the government gets big bonus points in my book.

Between over regulation and the advent of fake money (which is really behind the infinite expansion of government), I think it goes a long way to explain the stagnation of America in the last 40 years.

I find it hard to believe, as Paul Krugman has suggested, that "everything has been invented".

drjim said...

Hannity and Gingrich were mentioning the new vs existing regulations, and as of a day or two ago, it was at TWENTY-ONE old regs being scrapped for every new one allowed.

And I agree with SiG...this is one your best ones ever, BP!

Michael said...

In theory, I completely agree with the fact that less regulation is better. In practice I think the impact will have a lot to do with which specific regulations they are removing and which specific ones they are enacting.

Will said...

Michael:

Shorter: The devil is in the details

So far, looking good! (Well, more accurately, sounding good)

LetsPlay said...

I agree that "over" regulation has had very negative consequences. However, in place of regulation, we need a hearty Justice system to go after those in business who would over step the bounds of law, common sense, and good environmental stewardship all for the sake of profit. Too many examples exist of business leaders doing what they want to boost their results while in effect telling the public to "f-off."

So all I am saying is there still needs to be a "balance" of growth and progress done in ethical ways that protects the public, consumers and the environment.