The Next Recession

Many signs indicate that the economy is headed into another recession. The stock market is dropping. China’s growth is slowing. The Baltic Dry Index is at its lowest level in history, which means there is less international trade. Many predict that housing prices are about to collapse again.

While progressives such as Naomi Klein blame capitalism for these problems, the reality is that our current economic doldrums are the fault of too much government. As investment analyst Lacy Hunt points out, all of the economic tinkering since the 2008 crash has failed to spur the economy.

Some of it has done more harm than good. Remember when Chrysler and General Motors were taken over by the government to prevent them from going bankrupt–and then the government immediately forced them into bankruptcy? In a normal corporate reorganization, bond holders have first claim on the assets of the company. But the Obama Administration zeroed out Chrysler’s bonds in favor of its labor unions. That meant automakers would have to pay a premium for any future bond sales. Inconsistent government policies make investments risky and drive investors to less productive areas of the economy.

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Excessive regulation by every level of government is another hindrance to economic growth. In the 1990s, Peruvian economist Hernando de Soto showed that the reason why capitalism worked in developed nations like the United States and not in undeveloped nations like Peru was that government regulation in the latter countries made it extraordinarily difficult to get permits to start small businesses and get title to real estate. Today, the burdens of regulation in states like California and Hawai’i have practically reached Peruvian levels.

Then there’s housing, which in many places is suffering another bubble. As the Antiplanner has pointed out many times before, housing prices didn’t bubble before nations like Britain, states like California, and urban areas like Vancouver started imposing strict land-use regulation. Housing still doesn’t bubble in relatively unregulated regions. Unfortunately, pretty much all of western Europe, Australia, and the coastal regions of both Canada and the United States (which most of those nation’s residents live) are heavily regulated and thus subject to volatile housing prices.

Wall Street has learned the lessons of collateralized debt obligations, credit default swaps, and other financial instruments that caused the 2008 crash. But volatile housing prices exacerbate the financial effects of stock market swings and other economic indicators. Removal of those land-use rules would go far to smoothing out the business cycle and its effects on the average person.