Monday, May 21, 2012

The Fixed Pie Theory

Modern public policy in Western countries seems to be based upon the assumption that the economy is a fixed pie, waiting to be divided up "fairly." How else to explain the economic utterances of President Obama and the leaders of Western Europe? It's all about who gets what. Now "economic growth" is on their mind. Where has that been? Who thought about economic growth when politicians were busy saddling their economies with regulations and mandates?

The political leaders of the Western world seem to think that the government spending is the cure for what ails us. If that were true, would we be ailing? When did government spending not exceed revenues in any country in the Western world in the last three decades? Now we need more of the same? This is like the drunk, awakening with a hangover, asking for another drink to cure a hangover. Except, there is no more booze available.

Back when, western economies grew and provided rising living standards for their citizens. But that was before noble minded politicians decided that workers needed protection from management. Now workers have that protection, but no new jobs to go along with it What good is worker protection, if there are no jobs?

All of this is based upon the idea that economies do not and cannot grow. If economies cannot grow then sitting down to divide up a fixed pie makes perfectly good sense. But, sitting down to divide up a fixed pie may mean that the pie can no longer grow. That's where we are.

 Labor and management are natural enemies, so say the modern polticians. Therefore, all political activity should be devoted to providing benefits for labor -- minimum wages, health care, litigation weapons, disability rights, and on and on. The modern politicians got their way and now the reality of a fixed pie is upon us. The western countries really cannot grow any more at any significan rate.

Double digit unemployment is the new reality, both in Europe and in the US. It isn't fiscal stimulus that is needed, as Obama thinks, it is reform of our labor laws, repeal of employer mandates and an unshackling of an oppressive regulatory climate. Absent these things, the pie will stay fixed and we can continue to argue about who gets what, as opposed to having the pie grow larger.