Friday, September 6, 2019

Deregulation to Save Businesses?

No doubt there are regulations that make businesses cringe. Some of the regulations are administrative—like requiring OSHA accident reports and such. Others require some procedural changes—like more auditing or environmental and safety controls (e.g. safety harnesses on construction sites). There is a Office of Management and Budget study that shows generally a $1 in extra cost due to regulations saves the business and/or the community $4-10 in other costs—or benefits— such as medical bills and lost time due to accidents. [The linked report does critically review—pros and cons—the OMB’s and other researchers’ methods.]

And then there’s the report that environmental and safety regulations for the coal mining industry have been ‘relaxed’ in the past two years. Yet, mine closures are accelerating. In 2008, there were over 1400 mines (underground and surface); in 2017 there were less than 700. Demand globally has grown a bit in the past two years but at lower levels than the rate of demand increase in 2000-2010; advanced economies’ (like the US’s) demand has steadily dropped since 2000. Deregulation cannot overcome market forces: coal-fired power generation facilities continue to be retired in lieu of growing use of natural gas and renewable sources.
Source: International Energy Agency
If politicians (and coal bosses) want to blame the industry’s demise on regulations, there isn’t any evidence to support the claim. It’s simple market economics. Just like saying businesses will hire more people—coal miners, for example—if their corporate taxes are reduced. Demand is a bigger influence than regulations or taxes. Without demand, no amount of deregulation or tax reductions can resurrect a dying industry. Imagine trying to renew interest in VCR machines, pay phone (booths), slide rules, etc. through deregulation and tax cuts or other government subsidies. It really can’t be done. We business owners need to stop asking for such government aids to help our non-strategic business models.

Tuesday, August 6, 2019

Death By Loans

Among business owners there’s an adage about bankers: they won’t lend you the money when you need it; they’ll lend you money when the business is doing well and you don’t need a loan. When things aren’t going well for the business, not only won’t banks lend you money but investors won’t give you money either. At times in US history, the US government has served as the Investor for the economy. In this way, it has been an investor that allows for the ‘operations’ to continue until the sales rebound and the ‘business’ is self-sustaining. Most recently in the Great Recession of 2007-2009, the government invested in the automakers, big banks (TARP) and the economy—specifically poor households—as a whole with an increase in unemployment insurance, SNAP food assistance and Medicaid coverage for the unemployed. There were also ‘shovel-ready’ investments in infrastructure projects.

During the Great Recession, the US government went into more debt, borrowing from bond investors, to ease the pain of the Recession. The government revenue-spending deficit eased when the economy rebounded. But in the last 2 years and projected into the next 2 years, the government is spending—running a deficit—as if we’re in an economic crisis. What happens when the next recession hits? Will the government have any room to invest in the economy—that is, have the ability to sell more bonds in order to fund its desired investment? How much more debt room can the US take when it’s at a debt/GDP ratio of 0.8 and quickly approaching 1.0 or more?

Suppose your business was doing well. Instead of paying off its debts, you took on more. How worried would you be in the next downturn of the business cycle?