How Bad Can Our Economic Mess Get?

Sometimes it helps to ask, "How bad can it get?" Then we know the "worst case," and since that isn't the end of the world, we end up feeling better about things.

That said, our current economic mess isn't getting better with the mere passage of time. If we want things to improve, which we do, we will have to do things differently than they are being done today.

Simply stated, we will have to cause the economy to get better by our actions. In that regard, our government could best lend a hand by getting out of our way.

So regarding the economic mess and its ending, my answer to "how bad can it get?" is that until we seriously address (1) how to grow the private sector of the U.S. economy and (2) stop all unnecessary government spending at all levels of government, our situation won't improve anytime soon.

As with most successful market based endeavors, our economic prosperity is best achieved and maintained by sustained economic growth. That growth only comes from providing valuable goods and services to customers.

In addition, sustained economic growth is based on ongoing productivity gains. And those productivity gains largely depend upon investment. And that investment results from entrepreneurial risk taking. And that risk taking depends upon profit opportunity for the risk taker. It's really that simple.

If we don't create the environment necessary to produce sustained economic growth due to entrepreneurial risk taking, growth won't happen. And now that we have both outsized government and huge debt levels with which to contend, creating growth will be even harder to achieve.

Simply put, we have put ourselves in the awkward position of needing to practice public sector austerity while pursuing a private sector growth strategy at the same time.

Either that or we must be willing to accept the inevitable lower growth which will result from higher tax rates. When the president advocates a "balanced" approach calling for tax increases in the face of a 9.1% unemployment rate (which President Obama claimed wouldn't exceed 8%), that's a sure fire formula for continuing low to no economic growth. Maybe that's an astute populist re-election move, but it's a dangerous one for our nation's economic future.

If we elect to thwart economic growth through higher taxes, we'll be choosing to permanently adjust downward our standard of living in America. It's really that simple.

Additional tax receipts should result from the actions of individuals who generate additional income and not from higher tax rates. That additional income should come from additional economic and productivity growth due to entrepreneurial risk taking and incremental investment by private sector participants.

On the other hand, if we choose to raise additional government income by increasing tax rates, we'll limit economic growth and therefore employment levels as well. We'll then have less government income to redistribute.

Higher rates of taxation will mean that our American standard of living will be reduced. This will happen as the overall economy will be smaller than it otherwise would have been but for the tax hikes.

For sure, we won't be able to actually see what could have been, but even if we can't see the results of what we didn't do, that won't change the result. We'll have less than we would have had. That's a straightforward example of human nature and basic economics at work.

And here's the worst part of all. The poorest and the lowest income earners among us will be the biggest losers as a result of this smaller pie of the future. That's because when we attempt to soak the rich, it's the poor who always get the wettest.

In the U.S., the growing gap in tax receipts compared to government spending is widening. This is mostly attributable to a stagnant economy experiencing little to no growth. While some of the current governmental income to outgo shortfall is due to the "normal" workings of a recession, of course, much more is unrelated to the current recession and is longer term and of a structural nature.

Political Stalemate Holds Economy Hostage looks squarely at the future negative feedback loop effects if our economy fails to grow. It says this about both Europe and the United States:

"Today, political stalemates in Europe and the U.S. block both the short-term policies these economies need to avoid a return to recession and—importantly—also block the long-term course corrections required to get the economies growing faster in the future.

Europe needs to avoid financial calamity now and to decide whether and how it will move toward economic and fiscal integration or less integration. It cannot stay where it is.

In the U.S., it's hard to see what will power the economy over the next couple of years: It won't be consumers, still laden with debt. It won't be housing. Exports are up, but overseas economies are slowing. Local, state and federal governments are retrenching. Small businesses can't get credit, and big businesses look at all of the above and won't hire.

One lesson from Japan's past couple of decades: A prolonged bout of short-term economic sickness can produce long-term malaise, a decade or more of little or no growth. "The Japan scenario has not been definitively removed for the U.S.," Mr. Summers warned last week."

Although the challenge to resume substantial economic growth will be huge, it's imperative that we make every effort to accomplish just that. Private sector growth needs to be our nation's highest priority. That's the only real and lasting way out of this mess.

Here's what Charles Schwab, founder of the company bearing his name, has to say about all this in Every Job Requires an Entrepreneur:

"In his speech before a joint session of Congress on Sept. 8, President Obama said, "Ultimately, our recovery will be driven not by Washington, but by our businesses and our workers."

He is right. We can spark an economic recovery by unleashing the job-creating power of business, especially small entrepreneurial businesses, which fuel economic and job growth quickly and efficiently. Indeed, it is the only way to pull ourselves out of this economic funk.

But doing so will require a consistent voice about confidence in businesses—small, large and in between. We cannot spend our way out of this. We cannot tax our way out of this. We cannot artificially stimulate our way out of this. We cannot regulate our way out of this. Shaming the successful or redistributing income won't get us out of this. We cannot fund our government coffers by following the "Buffett Rule," i.e., raising taxes on Americans earning more than $1 million a year.

What we can do—and absolutely must—is knock down all hurdles that create disincentives for investment in business."

Schwab is right. Private enterprise is the only way out.

In sum, unless as a nation we focus squarely on creating private sector growth, we're in serious trouble. That is, if we continue down the path we're on--the continuation of the status quo and the erroneous assumption by the politicians that time and taxes will heal our problems--we won't grow anytime soon, and that will spell big trouble for America.

We will only begin to solve our problems if private sector companies invest in our future prosperity through entrepreneurial innovation and risk taking in the pursuit of best-in-class worldwide competitiveness.

There is no other way.

Thanks. Bob.