The amount of bull defecation coming from both sides of Washington's aisle continues to grow.  Time for a little thought please to be applied to one of the most frequently heard canards, indeed, one we've been hearing for quite some time.  To wit, businesses aren't expanding, jobs arent' being created and the economy is not gaining momentum because of the "uncertainty" generated by the possibility of stricter regulations and/or higher taxes.

This actually is the second generation of this canard.  In its original iteration, blame was placed simply on too many regulations and too high taxes.  That one didn't have a real long shelf life because even the doltish American public was wise to the fact that taxes (of all sorts) on business are lower now than they have been since the mid 1980's, and that regulations--running the gamut from safety requirements in the workplace to standards for food production and distribution to limitations on the gunk industry can spew into the air or leach into the ground or water supply to how devious and perverse the actions of the financial sector can be--are similarly at nearly an all-time low.

Confronted with statistics even climate change deniers and those who say tax cuts increase revenue couldn't deny, the argument shifted from "there are too many taxes and regulations" to there might soon be too many of each.

So here's a little thought on that subject.

The hindsight history provides isn't necessarily 20-20, but it's usually a pretty good standard to at least provide guidance into the future.  Going all the way back to the middle of the previous century (starting there because the second World War changed everything for the U.S.), it's impossible to find any correlation between tax rates and business health or the health of the economy in general.  If there's any trend to be found at all, it would be that the economy consistently grew or shrank on the basis of a wide variety of factors (oil prices, global and domestic politics, wars, technological innovations) that had virtually nothing to do with either taxes or regulations.

The corporate tax rate, for example, was 52% during the entire decade of the 1950's--the period of America's first great industrial and economic expansion.  In 1971, it went to 48% and stayed there through the rest of the '70's and nearly all of the '80's.  That's a period of time that included two booms and two recessions, one of them at least as bad as the most recent recession.

In 1988, it was dropped (by Reagan and George H.W. Bush) to 34%, and the economy very shortly thereafter went in the tank.  It was raised to 35% by Clinton, and the economy took off.  It has remained at 35% every year since then, during which time we had the boom years of the Clinton presidency and the bust years of the second Bush.

Really hard to see much correlation between tax rates and business health from those figures.

Regulations are obviously much more amorphous than tax rates, so a strict historical study is hard to do.  A couple of facts do stand out however.  The Scandinavian countries (Denmark, Finland, Sweden) all rank among the most heavily regulated economies in the world.  China, India and Brazil are among the least regulated.  Though there is obviously a difference in scale (Shanghai has more population than the three Scandinavian countries combined), the interesting anomaly is that they have nearly equally productive economies.  Regulation, or lack thereof, doesn't seem to be much of a factor.

Equally interesting is a study released a few months back by the World Bank ranking the world's developed nations from top to bottom in terms of "business-friendliness."  The major factors considered in the study were tax rates, number and types of regulations, the time required to start a new business and the number of business hours devoted to tax and regulation compliance.  On those bases, the United States boasts the fourth friendliest climate for business in the world (behind Singapore, Hong Kong and New Zealand).  Finishing near the bottom for business friendliness were China, Brazil, and India.

Paradoxically, China, Brazil and India are three of the fastest growing economies in the world and the U.S., at present, is one of the more stagnant.  The dynamism of the former and the stasis of the latter would not seem to be much related to regulation frequency or strictness.

The broader conclusion this all points to is that what drives economic growth is a factor that operates entirely independently of taxes and regulations--consumer/product demand.  If you look at the economic history of this country, every time there has been an economic downturn, consumer/product demand has been down.  Every time we have pulled out of an economic slump, the recovery has been driven by increased consumer/product demand.

To be sure, various factors have affected consumer/product demand.  The major recession in the 1970's was heavily influenced by the spike in oil prices, but its most noticable effect was that people suddenly had less disposable income and therefore bought less.

In fact, the one constant in our economic history has been that diminished consumer/product demand equates to slower or even no economic growth.  The big spike in inflation in the 1980's took money out of people's pockets and for several years, they stopped buying.  The economy tanked.  When inflation was deflated, buying power increased and people started buying again.

We are witnessing the same thing now.  The bursting of several bubbles in a row (tech, credit, housing) severely diminished buying power and eventually both employment and the overall economy tanked.  That is why so many economists have been braying as loudly as they know how for several months  that the two things required to start the economy moving again are aggressively addressing the foreclosure problem and creating more jobs.  Neither of those have anything to do with regulations or with taxes.  They simply require political will and the intellectual honesty to recognize that what increases the election odds for either party is not necessarily what is best for the country.

The foreclosure issue, which is the most glaring part of the broader home mortgage problem, is key because people can't buy "stuff" when everything they bring in is tied to a mortgage payment.  Nearly 20 million people have either already defaulted, meaning they've lost the single biggest asset they had, or are dealing with underwater mortgages, that is, mortgages that are higher than the value of their home.  Most economists agree that the most efficient way to (gradually) solve this problem is to require banks to write down the principle on their mortgage loans to the point that mortgage debt and home value are again in balance.  Banks of course are stubbornly opposed to this because it would hit them even harder than being forced to modify mortgage payments.

Then there's jobs.  Officially, 9% of Americans are out of work, but the real number is probably closer to 15%.  It goes even higher if you include the number of people who are currently working for half or less than they made a few years ago.

Here again, it doesn't make any difference how low you slice taxes or how many regulations you do away with; if no one is buying a company's product, the company isn't going to add new employees.  Left alone, what will inevitably result is a continuing downward spiral; fewer people buying things will result in more jobs lost, which will mean even more people unable to buy--and so on.

The fact that American business has in excess of a trillion dollars in cash reserves right now means that, in general, businesses are doing quite nicely satisfying existing demand with existing production capability.

So where will new jobs come from?  The only viable source is government--directly through investment in infrastructure and education projects, and indirectly through providing seed money for start-ups in areas like battery production and alternative power production.

Our roads, bridges, dams, canals, rail systems, airports and power grid--our infrastructure--received a grade of D by America's civil engineers a few years back.  That grade was issued, if I recall, just a few months before the overpass in Minnesota collapsed.  Things haven't improved since then, so investing in much needed improvements could hardly be called a pork project.  And the unfortunate fact is that there is not a lot of profit potential in building (or repairing) a bridge or dam or highway.  There are, however, a lot of people required to actually do those things, and that means jobs.

And when those 9-15% presently unemployed start bringing home a paycheck, they do two things--they start paying taxes instead of collecting unemployment, and they start buying things.  The former means that government revenue goes up and government spending goes down (deficit reduction?); the latter means that eventually, businesses realize they can't supply demand with existing capacity so they expand (more jobs).

That's my little thought on this subject.  I'm biased, but it seems persuasive.