The Macroeconomic Effects of Micromanagement

At present, oil economies all over the globe are fighting the downturn in the price of commodities upon which their budgets rely. Oil economies in the United States are no exception. For example, North Dakota communities are really beginning the feel the pinch as the realization takes hold that this may not be just another blip on the radar of an ever-increasing commodities cycle.

My own community is certainly no exception. The difference, however, is that the economy of the Permian Basin is an old hand to these swings in pricing. Alarmingly, however, the decisions by local government officials seem to reinforce the old adage that one “cannot teach an old dog new tricks”.

There are, at the very least, to major schools of economic thought of how one should respond to downturns in the macroeconomy. Unfortunately for policymakers, West Texas exists in the very contravention of one of those schools of thought. The foundational principal of the Austrian model is that production is the source of demand – i.e. Say’s Law. This theorem indicates that by increasing production, organizations will be forced to employ more labor to generate said supply, which will increase the income of those laborers, which will thereby increase demand in the larger economy… a virtuous cycle.

Perhaps the greatest failing of Austrian economics is that it does not accurately contemplate the forces of automation or productivity and the relation of those factors to how companies operate. In short, as recent economists have suggested, increased production incentivizes increasing the efficiency with which those products are produced. In short, even if labor spikes are temporarily necessary, in the absence of other factors, companies will invest in finding a cheaper alternative to labor through the use of automation, to product the same quantity of goods for a lower price – thus increasing the marginal profit each organization can take.

This is happening right now in the Oil Patch. The Permian Basin is often, and incorrectly, deemed an oilfield economy. What the communities and organizations in this region actually comprise is an oilfield services economy. Though there are some robber barons with vast land holdings in Midland County (and the income those holdings derive from the mineral interests contained therein), the much larger economy is driven by small e&p companies, mom-and-pop well servicing organizations, pipeline constructions crews, etc. As the price of oil dropped, the major players in the region and the world (the larger, more integrated oil and gas companies) began to demand more “bang for their buck”. The mom-and-pop shops and the major oilfield service companies like Halliburton quickly obliged, in the form of reduced costs and innovations to reduce the amount labor required to achieve the same work product. Layoffs were bound to start occurring soon thereafter, which is what we have just begun to see in many areas.

Which brings us back to the discussion of economic theory. The other major school of thought in the realm of economic reaction to industry downturns is Keynesianism, based on the ideas of John Maynard Keynes. In Keynesian economics, a government facing an economic downturn in private industry must “right the ship” by investing its own funds to support the labor being displaced in private industry. During the Great Depression in this country, this meant opening organizations like the CCC and undertaking huge public works projects like the Hoover Dam to employ otherwise unemployable labor. These labor programs are largely regarded, on both sides of the aisle (when each is being honest), as a major reason why this country was able to stabilize itself during the Depression while other parts of the world dissolved into near anarchy.

In an commodities based economy, then, there is only one difference between Say’s “Law” and Keynesian thought… Keynes’ theories work.

In light of this notion, which can be (and has been, repeatedly) proven through relatively simple mathematics and a review of history, it is interesting to watch the local government in my area and its decision-making processes. For example, was anyone aware that Ector County is the only place in Texas that does not presently employ an emergency manager or have a separate emergency management department? Would it surprise you to know that this is only a recent development?

To earn this distinction, the County Commissioners recently fired the Emergency Manager, in an effort to “save money”. Additionally, in their wisdom, this group of individuals also slashed $2,000,000 from the county’s budget due to the recent downturn in the economy. This decision shows a clear lack of understanding of real-world economics.

In any macroeconomy there are only two real sectors to include in the employment discussion, the public and the private. The private sector in Ector County and the region at large has ceased all hiring and is, in fact, actively reducing its workforce. If the private sector is reducing its workforce, whom does that leave to pick up the slack in the economy? If the public sector also begins slashing spending (and, thereby, slashing employment) that means that the public sector will have actively worked to entrench the effects of the downturn in the economy that it is tasked with nurturing.

For a more appropriate – though imperfect response – one need only to look at the budget of the county seat of Ector County – Odessa. While the city council of that community approved a lower tax rate overall, they did so with the understanding that actual revenues would increase due to the number of properties being taxed and increased assessments on improved properties in general. This, in turn, provides adequate reserves for the City of Odessa to increase spending, which is absolutely required to support the local economy until the private sector is in a position to once again shoulder the load.

It is understood that this means an increase in government spending, which is also understood to be an anathema to many of the local public officers. What is needed in this case, however, is leadership. True Leadership (capital L) means making the tough decisions when required. It means doing things that one may not, under ordinary circumstances, undertake. What leadership is not, however, is offering weak platitudes about what one feels while Rome burns down around them.

Time will tell, of course, if local commissioners are able to turn course from the present disastrous tack they have chosen. I look back at the history of this community, and am afraid.

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One Response to The Macroeconomic Effects of Micromanagement

  1. Pingback: Game Changer: La Entrada al Pacifico | The Wolf Camp

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