The 2007 “Black Swan” has not lost its bite
By Robert Dickie III.
Regulation worsens “Black Swan” events.
As more Americans struggle to build a full-time life in a part-time world, the cosmic shift in job creation from steady employment to a patchwork of professions leaves many wondering when this will end. This question assumes some kind of jobs bubble burst, forcing market corrections that someday will lead to a more stable employment platform.
The current employment shift is a “Black Swan” event, marking a new direction for job creation we are only beginning to address. Black Swan events mark unpredictable, game-changing shifts that forever alter the course of what comes next. They are like the proverbial meteor striking the Earth, changing life as we know it.
One such strike was the economic collapses in 2007-2009, followed by the aftershocks that rapidly spread around the world, felling global titans and crippling nations. For aspiring workers, the repercussions remain severe, as today three part-time jobs are created for every one full-time job. Too little attention is being paid to how the historically low labor participation rate is impacting evolving economic systems.
Instead, in the United States, Americans have spent the last two years arguing over the Affordable Health Care Act and its impact on the economy, as if this were the premier event choking growth. This has prevented us from addressing equally important issues that in the long run will have an even greater impact on our economy.
Three issues in particular are evidence of a Black Swan event reworking our economic structure: The increasing rate of globalization, the advancing technology displacing workforces, and the suffocating laws and regulations governing free-market capitalism. All three have had a much greater impact on an unprepared global population, far beyond the scale of the Affordable Care Act.
Today, globalization swallows up industries across national lines, as businesses seek economies of scale to keep costs low and stockholder returns high. Even China is losing jobs to other countries offering cheaper labor. Outsourcing in search of cheap labor continues to displace more workers than any other event in the economy.
The second strike for such company-driven communities is how technological advances are also making large workforces irrelevant. If your job can be automated, it will be automated. It is just a matter of time.
How Government Can Help
But in one area of profound economic impact can government and elected officials truly have an impact—ending the stranglehold of regulation and legal barriers to market entry. There is a place for certain regulatory guard rails. But red tape and government regulations top the list of problems for business, according to the National Federation of Independent Business’ “Small Business Economic Trends” report.
Obamacare is a case in point. It is not the cause of this anemic growth, but it is an additional regulatory anchor, making progress extremely difficult.
In light of market forces wiping out so many jobs, government must be more cautious about enacting legislation and regulation, which impede job creation. The health of the employment market should be as important to politicians as health care.
Some might incorrectly assume by the above article that I espouse an environment of NO government regulation and intervention so as to allow the “invisible hand of the market” to regulate global commerce totally. Although I clearly lean more towards Adam Smith’s teaching in his seminal work, Wealth of Nations, I would not take the draconian stance of absolutely no government involvement. I believe government plays an important role as long as it is measured and balanced. Any system without laws and governance is ripe for abuse. Safeguards are clearly needed to protect the system and everyone within it. The opposite end of the spectrum is total government control of the economy, and over the past century we have seen multiple examples of socialist states that have tried this experiment and failed.
Regardless of political leaning, party, and agenda, most economists consider free market capitalism the best method of wealth creation and prosperity for a society. It is a system that over the past century won out in multiple countries all around the globe. Those countries that leverage a free market system grow faster and have more stability than those governed by a socialist system or dictator. The results are clearly obvious and pointless to argue. The debate, however, is centered around how much governance and oversight a government should have on the system and at what point does government become a hindrance and start to stifle and kill the system it is trying to protect.
Just as nature needs a state of equilibrium, our global free market system needs the same. We must have a delicate balance between a free market allowed to grow without encumbrances and the proper amount of regulation to protect everyone within the system and to make sure we don’t drive the car into the ditch.
Even with the disaster of 2007 and all the financial trouble we as a country have had, America is still considered the safest place in the world to do business because of our laws and the system we have in place. To protect this edge and our global dominance in the business world, we need to ensure that helpful regulations that act as “guard rails” are in place. We also must ensure that we protect against harmful regulation that chokes commerce, protects state-favored industries, and hurts job creation and growth. It is a delicate balance.
Repeal of Glass-Steagall Act of 1932
For example, many consider the 1999 bi-partisan repeal of the Glass-Steagall Act of 1932 to be a catalyst that helped set the stage for the worst financial crisis since the depression. This legislation had been an important “guard rail” in our economy for over 66 years. It allowed banks to take money from clients and issue loans while it allowed investment firms to sell securities, but neither could do both. There was clear separation between being a bank and being in the securities business. Once this law was repealed in 1999, it allowed banks to enter the securities market and they started operating like giant casinos taking on enormous risk with the hard-earned deposits that everyone felt was securely deposited in their local bank. Would you give your life savings to a drunk to play poker with in Vegas? That is exactly what the bankers were doing with our money after 1999. When the music stopped, most of the banks had to be bailed out by the government (me and you). In hindsight, the “guard rail” of Glass-Steagall was pretty important.
Furthermore, regulators during this time that were to be protecting the system weren’t. They were asleep at the switch and in the case of the rating agencies like Moody’s and Standard & Poor’s, some consider them to have been complicit in what could be considered at worst fraud and at best a horrible job investigating and rating securities. They gave AAA ratings to worthless bonds, so common investors thought they were investing in a safe securities when in reality they were taking on enormous risk.
The debate continues to rage on: Should we have more or less regulation following the 2007 Black Swan event? I would argue we don’t need more, we just need to enforce the regulations we already have on the books. We also need to be careful not to swing the pendulum too far to the side of over regulation or de-regulation, as either creates a system ripe for disaster.
We need a delicate balance between both. Finally, all new regulations need to be reviewed regarding the current and future impact on the system as a whole; otherwise the Black Swan event we had in 2007 will not be a rare event but will become common place in our new economy.
Regardless of the regulatory environment, the ripple effect from this one event will impact each of us for the rest of our lives. The economy is forever changed, and how you prepare to navigate it is extremely important.
Originally posted 5/25/2014.