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BWC Market Update - October 21, 2016

“I would rather be exposed to the inconveniences attending too much liberty than those attending too small a degree of it.”

                                                           - Thomas Jefferson

All the talk after last month’s FOMC meeting was about the Fed’s (close) decision to postpone any increase in the Fed Funds rate until at least December.  The merits of waiting and whether politics played a role were discussed at length.  Lost in the noise was a much more troubling note in the Fed’s minutes; they reduced the long-term growth rate forecast of the U.S. economy to 1.8% per annum (from an already low 2% figure adopted only earlier this year).  We have addressed such figures before, but it is worth noting again the impact of such slow growth. Over a generation (25 years) the cumulative difference in national income between 3.2% growth (the average U.S. growth rate since the end of World War II) and 1.8% growth is over $120 trillion and the economy at the end of that period would be over a third larger at the trend-line growth rate.  That’s a lot of missing money!  What’s going on?  A popular theory is that what happened in the years after WWII was extraordinary and is unlikely to be repeated.  Specifically, lower productivity going forward will prevent a recurrence of the post-war boom.  The Wall Street Journal (October 14, 2016) had an article entitled “Why the Economy Doesn’t Roar Anymore” propounding this view, citing the increase in education rates, for example, as a driver of productivity that can’t be repeated.  This view is shortsighted in the broader sweep of history and shortchanges the American people.

Over the past two centuries new technologies have created whole new industries and tens of millions of jobs.  In 1800, 80% of the workforce was engaged in agriculture.  By 1900, the figure was half that and today it is less than 1%.  Imagine in 1800 being told that half of those employed in agriculture would lose their jobs over the next century.  It’s easy to see that this could lead to a dystopian view of the future.  But who in 1850 foresaw telephone operators, movie directors, and auto mechanics?  Who in 1900 foresaw airline pilots, assembly-line workers, and disc jockeys?  Who in 1950 foresaw video game programmers, app developers, and ultrasound technicians?  The 1964 New York World’s Fair, entitled “Futurama”, barely scratched the surface of what we have seen in just the 50 years since.  Wait, my smartphone is ringing -- I need to turn down my 50-inch plasma TV!

Are Americans getting lazier and less innovative?  I don’t think so -- ever watch Shark Tank on Friday nights?  What has changed?  The burden of government regulation! 

According to the U.S. Chamber of Commerce, the Federal Register of Regulations had 9,745 pages in 1950 and 174,456 in 2014.  The aforementioned WSJ article specifically labels 1973 as the year when productivity growth began to weaken and Bernie Sanders, on his presidential-bid website, also cited the early 1970s as the turning point for the fortunes of American workers.  Look at the following chart of the number of pages of regulations added to the Federal Register since 1936:

PagesInFederalRegister 

Note the sharp uptick in the early 1970s!  It is also interesting to note that the decline in the growth rate (not the absolute number!) of new regulations in the Reagan years coincided with one of the fasted growing decades in American history.  These numbers do not even take into account the commensurate burden of state and local regulations. 

No doubt, many of these regulations are desirable, those dealing with worker safety and environmental protection, for example.  However, a staggering number involve time-consuming reporting and record keeping and other administrative diktats of the state.  The desire to regulate all the “inconveniences of too much liberty” has surely left us “too small a degree of it”!   It is time to undertake a thoroughly comprehensive review of every regulation in the register, including those at the state and local level, with an explicit goal of eliminating many of them.  Trillions of dollars and the American Dream itself are at stake!    

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