Economic Dysfunction: The Systems Mindset Dissection

The Navy's Blue Angels: precision, cooperation and power compliments of the federal government. Yet, in 2010, this is so NOT an analogy for government economic gyrations.

In examining a primary system via the simple logic of the systems mindset, there is no room for ideological menus or self-serving rationalizations as these influences lie outside the system itself. Unemotional, non-partisan fact: In the United States, thirty million small businesses are hoarding cash, dramatically slowing overall economic activity. The same business contraction can be seen elsewhere around the world.

From a purely mechanical standpoint, how come?

Often risking everything, the small business owner delicately assembles and then carefully maintains an enclosed system that will produce something of value which, ultimately, could deliver a profit. If an outside intruder creates an unstable environment while promising to seize huge portions of any profits that might emerge, business investment – and jobs – will decrease as the business owner retreats. Why should anyone be surprised at this? It makes complete sense.

What we have is individual business system corruption. A system is corrupted when, from outside influence, its resources are drained, its unique purpose is hijacked or competent management is compromised. The worst scenario – what we’re experiencing now – is when all three external influences occur simultaneously. Here’s my systems-mindset analysis of why small business owners are holding back (and hanging on for dear life):

• Uncertainty: A system can’t function efficiently if the environment is constantly shifting. Every day brings new surprises and/or bad news for business owners. For the fearful business owner, it paralyzes. For the courageous, it means hoard cash and hunker-down.
• The overt  intrusion of government. Introducing inefficiency into an efficient system will cause the system to become inefficient. It’s like a disease. Again the private business system owner’s response is paralysis and/or hunker-down.
• Encroaching socialism. If a system’s resources are drained by an outside entity, the system will operate inefficiently. Nearly ½ of the population pays no income tax while receiving government subsidies. The very top echelons – the largest corporations – also receive government subsidies of one kind or another. These gifts to both the bottom and the top are paid for by the capitalistic middle class which is shrinking as it is plundered. This is not an environment that encourages risk and investment by small business. We cringe.
• Suspicion of a sinister motive: Is there a deliberate reversal of roles underway in which the private sector is being thrust into service to the government, rather than the other way around? We business owners are stuck in neutral as we try to figure out if this is true (and, if it is true, what to do next).
• Income taxes are high and going higher: If a system’s resources are drained by an outside entity, the system will operate inefficiently. There is little personal incentive for a business person to take risks to build a business system if most of the reward will be confiscated by government. Raising taxes is the worst thing that could happen right now and we all know it. Arthur Laffer has it right.
• Regulations are increasing: A system will bog down or stop altogether if inefficient components are introduced and/or vital components are compromised. The image of a Rube Goldberg contraption comes to mind. (Contrary to popular opinion, “deregulation” is not responsible for the current economic problems: Federal regulatory personnel have increased by 57% since the year 2000.) As roadblocks accumulate and things get more complicated, there is less reason to invest and more reason to sit it out.
• The stimulus, bailouts, take-overs and wasteful spending. If a system’s resources are drained by an outside entity, the system will operate inefficiently. The government’s various efforts that do little more than prop up inefficiency are funded by those of us who are efficient. Truth is,  business failure is OK. It’s a necessary cleansing in which efficiency replaces inefficiency. Here, real-world reality is ignored and that makes us very nervous.
• Obsession with “minority rights.” A system will bog down if senseless complication is introduced and/or vital components are compromised. Endless executive, legislative and judicial bowing to gender, race, political ideology, socio-economic, education, age and religious differences is taking an enormous toll on everyone except those who profit from those divisions. I agree with David Asman‘s bold words: “The word minority is a stupid word and it’s a stupid label to put people under. We are all different and none of us are insignificant or minor.” The focus on the political correctness of minority affairs burns up energy, creates  inefficiency and pits us one against the other. (If there is to be a minority, let it be the ultimate minority: the minority of one, the individual.) We business people watch in awe at the utter lunacy of it. (And, if you bristle at what I just said, stop short of calling me a bigot. The mother of my children is Puerto Rican.)
• Government take-over of health care. In most cases a primary system with inefficiencies doesn’t require outright replacement. Instead, the system should be kept intact and its sub-systems carefully tweaked into efficiency. The existing health care system worked well – it’s been the best in the world – it just needed adjustment (competition across state lines, less regulation, tort reform, etc.). Business people know the health care takeover by the federal government means private insurance is going to disappear, prices are going to up and quality of care is going to go down. This is not going to be good for our employees or for us.
• The future seems hopeless when federal government jobs – jobs that are paid for by taxes on private sector business – provide pay and benefits more than double what private enterprise pays workers. If a system’s resources are drained by an outside entity, the system will operate inefficiently. The private sector economic system creates valuable goods and services. Government systems produce little value in the form of goods and services and instead specialize in redistribution of wealth. Rewarding non-producers while punishing producers defies mechanical logic (and therefore must be politically motivated). As the public sector drains the private sector without adding back value, many of us in business fear there could be a total economic collapse. It’s happened before. Again, more reason to cringe and hoard.
• Will it be more deflation, then inflation, or…what? A system can’t function efficiently if the environment is constantly shifting. Now we’re back to where we started, with uncertainty, compliments of the federal government’s free-form monetary policy. “Experts” won’t even hazard a guess but there are lots of us who fear some higher degree of deflation, maybe approaching depression, followed by inflation, possibly hyper-inflation. Discount every point I’ve made so far and this uncertainty alone is enough to put the big boys and small business owners alike in the closet, staying liquid; staying safe. (Here’s a past post further elaborating  this point.)

I’ll add the obligatory caveat before the hate mail arrives: Yes we need government regulation and protection to take care of some obvious criminal activity in the private sector. However, government regulatory and protectionist power, if overused in efforts to dominate its constituents rather than to serve them, will wreak far more foundational destruction than corporate criminality.

Standing outside and slightly elevated, thirty million small business owners watch, wait and cringe.

Subscribers: There are still a few seats left for the September 18th Workshop. If you liked this post, please pass it on.

(Photo by DVIDSHUB via flickr used under a creative Commons License.)

Tagged as: david asman, economy, free enterprise system, free market, government intrusion, minority rights, socialism