U.S. non-farm labor productivity declined at a 4.6% annual rate in the second quarter of 2022, following a 7.4% decline in the first quarter. Although predictable from the expansive employment numbers and the declining GDP, this is shocking news, which the media have largely ignored. There also seems little likelihood of a near-term reversal. Like the hero of the 1957 sci-fi movie classic “The Incredible Shrinking Man,” the U.S. economy has woken to find itself shorter than its wife and will shortly be battling the spiders.

For those who missed it, The Incredible Shrinking Man concerns a happily married man, Scott, who sails through a mysterious radioactive cloud and thereafter discovers all the atoms of his body steadily shrinking in size, so that he reduces from human size to that of a midget, to living in a dolls house to battling a spider in the basement. At the end, reduced to submicroscopic size, he wanders off into the infinite. It is a satisfyingly chilling horror movie, although the 1957 special effects now add an additional unwanted element of cheesy comedy.

The similarities to the current U.S. and global economies are striking. As discussed in this column four weeks ago, the radioactive cloud that has doomed a previously healthy economy consists of a poisonous mix of policies, the two most important of which are GOSPLAN off-market interest rates and productivity-destroying regulations, especially in the environment/climate change area. There is nothing specifically unhealthy about the economy without these policies; technological innovation continues at a rapid pace, although much of that innovation is only marginally relevant to any worthwhile economic benefit. However, as this week’s data show without doubt, the radioactive cloud of abominable policies is now dooming the U.S. economy to eternal shrinkage.

There are other policies implemented recently that will add to the intensity of the radioactive cloud. The laughably named “Inflation Reduction Act” contains provision for an additional 87,000 IRS employees, doubling the size of the agency. This is justified on the hypothesis that these additional agents will “find” additional tax revenues – by doing so, they will greatly help the Inflation Reduction Act’s numbers to add up. However, one assumes that the IRS, with over 80,000 agents already, is already pursuing the most attractive opportunities for revenue enhancement, doubtless discovering that most billionaires have good tax accountants. Below that level are indeed a multitude of tax return falsifiers, who do not bother to go through the rigmarole of spurious “charitable foundations” but openly leave their sloppy tax returns where the IRS can catch them out.

That is all well and good, but an additional 87,000 agents will encourage the IRS to delve deep into the middle class to search for additional revenues. Those revenues will generally not be available from the ranks of highly salaried corporate executives, lawyers and lobbyists whose principal income comes from a salary and bonuses that are declared to the IRS by the corporation paying them and therefore leave little room for shenanigans. Such people will take little time to audit and will yield little additional revenue for the IRS if they are audited.

The principal effort of those additional 87,000 IRS agents will thus go into auditing small business, which will have to devote a large portion of its attention to combating aggressive IRS intrusions. Doubtless the IRS audits will find innumerable items where the small businessmen have misinterpreted the obscure and impossibly complex IRS regulations and will then be able to pounce, extracting large, unjustified but legal penalties after having done so.

Naturally, this will further devastate U.S. productivity in the small business sector. It will also further devastate innovation. Innovators are frequently self-employed or employed by small businesses, and are often sensitive and unworldly, poorly suited to coping with the IRS breaking down the door at 5am. Even if the additional IRS agents bring in more taxes than their direct cost, therefore, it is difficult to imaging a hiring that could more directly damage the already ailing U.S productivity and innovation.

A second relatively new development that further expands the radioactive cloud infecting the U.S. economy is the fashion for ESG (environment, social welfare and governance) investment that has taken hold of the largest fund managers. This would not matter – their silly investment strategies would merely reduce their performance – except that they have taken to voting the shares that they control in accordance with ESG norms. Since between them they control very substantial share percentages of all companies in the major share indices, their crackpot voting strategies thereby force corporate management to comply with their monstrous dictates.

The power of these institutions is however artificially inflated and misdirected, by their holdings of massive investment funds that are formally indexed to one or other of the major stock indexes. In these holdings, the fund managers have perverse incentives. They cannot sell their holdings and are judged by their match to the index’s returns, not by any absolute performance. They thus have very little incentive to vote in accordance with shareholder value maximization, since non-maximization does not affect their performance against the index. Hence cuckoo ESG goals are given priority for these holdings, which being so large come to dominate shareholder votes, to the great detriment of ordinary shareholders and the investee companies themselves.

Since these fund managers cannot be trusted to vote their shareholdings appropriately, the solution is to disfranchise shares held in an indexed portfolio from voting. By doing this, voting is restricted to those shareholders who have made a conscious investment decision to hold the shares (by all means, including institutional holders in non-indexed accounts). Such a reform would ensure that all the shareholders voting on a proposal have a genuine economic interest in seeing the company succeed; it would also usefully greatly reduce the power of random irresponsible wokies in the fund management companies. Thereby at least in this limited respect, proper capitalism would be restored to the U.S. economic system.

With this current and steadily increasing level of policy “radioactivity” the shrinking of the U.S. economy is likely to continue. This will have a very unpleasant effect on living standards, as a relentless supply of low-cost, unskilled immigrants provides murderous competition for low-skill domestic workers. This has been the case since the 1990s, but the effect on U.S. living standards has so far been masked by the continuing modest increase in productivity. Without that increase the only limitation on the decline in wages will be local minimum wage legislation, if adequately enforced against politically-connected sweatshops.

However, inflation should it continue at around the present level, reduces the real value of minimum wages; these are mostly not “indexed” since politicians like to get credit for increasing them in election years. Thus, the combination of inflation and immigration would rapidly reduce real wages for the less skilled and would continue to do so.

The devastating continued decline in U.S. living standards will have an effect on U.S. geopolitical influence. The country will no longer be able to afford its current global commitments. That will have most unpleasant effects – think of the scene in “The Incredible Shrinking Man” when Scott, now living in a dolls’ house, is pursued with near-fatal results by the family cat, of course unaffected by the radioactive cloud. In this context, the most obvious cat is China, which has its own problems but is at least avoiding the sillier self-destructions of “climate change” regulation — building coal-fired power stations at an unprecedented rate.

Should the U.S. economy survive the encounter with the Chinese cat, which struggle will undoubtedly increase state control, as did World Wars I and II, its existence like Scott’s battling spiders in the cellar, will become almost unrecognizable to the current generation, with mass poverty and state control like the old Soviet Union. The technology for Big Brother to Watch You will remain, but the innumerable comfortable gadgets to which today’s generation have become addicted will disappear, as the capability to manufacture them is lost. State regulations designed to limit carbon emissions of a much richer country will continue to oppress the remaining American helots and further limit their life chances. The movie will end however, not with Scott’s somewhat spurious exit into microscopic Nirvana, but with the U.S. population’s final descent into starvation and squalor. Real life lacks the cozy endings of the movies.

There is only one solution. The radioactive cloud of destructive policies must be destroyed, so that the U.S. economy, unlike poor Scott, can cease shrinking and resume its previous contented existence. There is still time to achieve this, but not much!

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There was no Bear’s Lair on August 15th due to logistical difficulties — regular content is scheduled to continue!

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)