Common Cents & The Rule of Law on June 12, 2020

Believe it or not, I have always attempted to be as apolitical as is possible in this newsletter. I don’t always succeed, but I still try nonetheless. Of course, most folks can probably tell by now how I am wired, but talking politics really isn’t my cup of tea. I am not nor will I ever run for an elected office. Also, debating political positions with people has two possible outcomes: 1) they agree with you, so why are you wasting your breath? 2) they disagree with you, so, again, why are you wasting your breath? They obviously aren’t very smart, right? Ha.

In the past, I have also discussed how every successful economy has three things in common: 1) adherence to the rule of law; 2) strong individual property rights, and; 3) the adequate development of human capital. IF you have those three things, people will want to live, work, and invest there. It is kind of simple, really. However, I should probably clarify a few things.

First, it doesn’t matter what the law actually is, within reason of course, as long as it isn’t capricious, is transparent, is easily enforced, and is evenly applied. Second, the state can’t expropriate your property without adequate, fair-market compensation. Third, the workforce is adequately educated and trained to meet and/or exceed the needs of the local economy, which are subject to change over time.

Not surprisingly, this is much easier said than done, and compliance with these so-called rules can often be subjective and even relative.

As everyone knows, our nation has recently experienced some of the most widespread societal unrest in roughly 50 years. In many instances, protests turned into riots, resulting in significant damage to personal property and looting. Some city governments have responded by vowing to ‘defund’ their law enforcement agencies and/or even abandoning police precincts.

While these things might be political popular and even good short-term solutions to deescalate the violence, they could be inappropriate if the long-term goal is to have a strong economy. I understand that statement might not popular; however, what message does the business owner with the ransacked store receive when the authorities respond in such a manner? When the latter likely has neither the ability or desire to catch the people who destroyed the property? Obviously, this is a problem.

First, rioting is almost the very definition of the lack of the rule of law. Second, looting is the unlawful taking of private property in the absence of effective law and/or civil enforcement. So, what happens to the economy of an area subject to rioting and looting? When the local authorities fail to reestablish control after disturbances? When they are inadequate in addressing the property rights of their citizens and business community? Going back to the question in the previous paragraph: again, what message does the business owner receive?

It will be hard to not let recent events, let alone the causes for them, impact your reaction when reading this piece. Plenty of people responding to this line of thinking will counter with “yes, but this time is different.” This is completely understandable, and I get it. However, the heart and the wallet are completely different. The former is emotion, and the latter is economic reality.

To be sure, plenty of businesses will simply sweep up the shards of glass, chalk up their losses, and get back to work. In fact, the majority of them probably will. However, enough won’t. This will depend on the extent of the damage, the location, and the community’s commitment to the three characteristics I outlined above.

The kneejerk reaction is to do whatever is necessary to ‘move this past this’ with as little confrontation and/or unpleasantness as is possible. While that might soothe frayed nerves, ameliorate both guilt and resentment, and play well in the polls, it won’t necessarily be the best thing for long-term economic vibrancy. The authorities can always change the laws/rule later, but they have to enforce the ones they have on the books until then. Admittedly, this isn’t about addressing a societal wrong. It is about economics, and only economics.

The thing, problem even, is, my initial reaction to situations like these is almost always to wonder what the economic impact will be. This might seem cold-hearted, but I assure you it isn’t. After all, I can think of no better way to escape poverty and eliminate disenfranchisement than a healthy economy. One with plenty of businesses and job opportunities for the local population. Where government coffers are full enough to provide adequate fire and police protection, education, and infrastructure. A boy can dream, huh?

In the end, you know, perhaps if the authorities in the areas with most unrest had focused more on adherence to the rule of law from the start, they wouldn’t have to worry about the economic outcomes of tomorrow. Again, it doesn’t matter what the law actually is, as long as it isn’t capricious, is transparent, is easily enforced, and is evenly applied. IF, and that is a big if, we can all agree to do that moving forward, from this time and forever more, the US economy will rebound much more rapidly after COVID19 than it would otherwise.


Have a great weekend.

John Norris

Chief Economist



As always, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, are subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the reset of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.