Monday, June 17, 2013

Why the U.S. Economy Could Be in a Long Term Slow-Go Mode ... It's Too Hard to Do Business Here ... IT'S THE GOVERNMENT, STUPID!

{NOTE: I'm a long term optimist about the U.S. and our economy's ability to grow. Risk taking entrepreneurs operating in a market based economy will assure us of that future. But we definitely need less government and more personal freedoms, including the freedom to fail.

By  first halting, and then reversing, the now 80+ years movement in America toward redistributionist socialism, the future can and will be a bright one indeed.

But we have to get started and to do that, we have to agree we have a problem of too much elitist government and therefore too much government spending. That, of course, means too much in taxes paid and too much borrowing at all levels of government, which are both harmful to our citizens' personal freedoms, well being, and long term prosperity.}


With all that said, let's discuss today's current situation.


Our economy continues to struggle. Stimulus spending programs, tax cuts, sequester centered spending cuts, tax increases on payrolls and efforts at making the "rich" pay their "fair share' (whatever this is, other than more) have all been tried as fixes. And they've all failed.

Yet our economy is still stubbornly weak. So what's the problem? Too much government and too litle private sector freedom and risk taking, in a nutshell. Government spending and taxes go together and private sector investment and economic growth go together. When government spends more, it takes more from the private sector.

In addition to less private sector investment and entrepreneurialism, more government spending creates an environment where non-work is often more "profitable" than work.

The "progressive" playbook of taking and redistributing works for some period of time in a strong and growing economy. But after the bubble has burst, it kills any propects of strong economic activity when there's less to redistribute and less left for private individuals to invest.

Stated another way, the economy now is pretty much like us trying to tread water indefinitely with a weight on our back. We can continue to stay afloat for a period of time, but at some point exhaustion sets in and we have to resume swimming, assuming we don't want to drown. Getting at least some of that heavy "redistribution" weight off ALL our backs would be the first smart thing to do, but that's not the way the "progressives" govern. So for now we're stuck.

Economies trying to get unstuck and resume strong growth are like swimmers treading water. When contraction sets in, politicians try to stimulate the economy and get it growing again. Too often they do that by raising taxes (on current taxpayers) or borrowing money (for both current and future taxpayers to repay) to "stimulate" the economy. Then when that doesn't work as intended, they try even more of the same. Nothing improves. In fact, things get worse.

That's pretty much where the "progressives" find themselves today and therefore We the People find ourselves as well. Treading water in what has been for far too long a contracting economy when compared to its potential for growth. The more government spends to soften the blow, the longer it takes for the U.S. economy to resume swimming at its previously normal pace. The "new normal" has set in and it's not a normal we want to leave to our kids and grandkids. The "old normal" works much better.

How America Lost Its Way has the gory story:

The decline of America's institutions, and the related rise in red tape that hinders business, may spell the nation's economic doom. Harvard's Niall Ferguson talks to WSJ's Charles Forelle about the theory outlined in his new book "The Great Degeneration."

"Not everyone is an entrepreneur. Still, everyone should try—if only once—to start a business. After all, it is small and medium enterprises that are the key to job creation. There is also something uniquely educational about sitting at the desk where the buck stops, in a dreary office you've just rented, working day and night with a handful of employees just to break even.

As an academic, I'm just an amateur capitalist. Still, over the past 15 years I've started small ventures in both the U.S. and the U.K. In the process I've learned something surprising: It's much easier to do in the U.K. There seemed to be much more regulation in the U.S., not least the headache of sorting out health insurance for my few employees. And there were certainly more billable hours from lawyers.

By the Numbers

  • 433: Total number of days it takes in the U.S. to start a business, register a property, pay taxes, get an import and export license and enforce a contract
  • 368: Total number of days it took to do the same in 2006
  • 7: U.S. ranking, out of 144 countries, on the World Economic Forum's 2012-2013 Global Competitiveness Index
  • 1: U.S. ranking on the 2008-2009 Global Competitiveness Index
  • 33: U.S. ranking for its legal system and property rights in 2010 on the Fraser Institute's Economic Freedom index, out of 144 countries
  • 9: U.S. ranking for its legal system and property rights in 2000
Sources: 'Doing Business'; World Economic Forum; Fraser Institute

This set me thinking. We are assured by vociferous economists that economic growth would be higher in the U.S. and unemployment lower if only the government would run even bigger deficits and/or the Fed would print even more money. But what if the difficulty lies elsewhere, in problems that no amount of fiscal or monetary stimulus can overcome?

Nearly all development economists agree that good institutions—legislatures, courts, administrative agencies—are crucial. When poor countries improve their institutions, economic growth soon accelerates. But what about rich countries? If poor countries can get rich by improving their institutions, is it not possible that rich countries can get poor by allowing their institutions to degenerate? I want to suggest that it is. . . .

Seven years of data suggest that most of the world's countries are successfully making it easier to do business: The total number of days it takes to carry out the seven procedures has come down, in some cases very substantially. In only around 20 countries has the total duration of dealing with "red tape" gone up. The sixth-worst case is none other than the U.S., where the total number of days has increased by 18% to 433. Other members of the bottom 10, using this metric, are Zimbabwe, Burundi and Yemen (though their absolute numbers are of course much higher).

Why is it getting harder to do business in America? Part of the answer is excessively complex legislation. A prime example is the 848-page Wall Street Reform and Consumer Protection Act of July 2010 (otherwise known as the Dodd-Frank Act), which, among other things, required that regulators create 243 rules, conduct 67 studies and issue 22 periodic reports. Comparable in its complexity is the Patient Protection and Affordable Care Act (906 pages), which is also in the process of spawning thousands of pages of regulation. You don't have to be opposed to tighter financial regulation or universal health care to recognize that something is wrong with laws so elaborate that almost no one affected has the time or the will to read them.
NOW READ THIS: A Senate aide pushes a stack of documents bound in red tape. They were used as a prop during a debate on the budget on March 22.
Who benefits from the growth of complex and cumbersome regulation? The answer is: lawyers, not forgetting lobbyists and compliance departments. For complexity is not the friend of the little man. It is the friend of the deep pocket. It is the friend of cronyism. . . .
What is the process at work here? Perhaps this is a victory from beyond the grave for classical Western political theory. Republics, after all, were regarded by most ancient political philosophers as condemned to decadence, or to imperial corruption. This was the lesson of Rome. Democracy was always likely to give way to oligarchy or tyranny. This was the lesson of the French Revolution. The late Mancur Olson had a modern version of such cyclical models, arguing that all political systems were bound to become the captives, over time, of special interests. . . .
Whatever the root causes of the deterioration of American institutions, smart people are starting to notice it. Last year Michael Porter of Harvard Business School published a report based on a large-scale survey of HBS alumni. Among the questions he asked was where the U.S. was "falling behind" relative to other countries. The top three lagging indicators named were: the effectiveness of the political system, the K-12 education system and the complexity of the tax code. Regulation came sixth, efficiency of the legal framework eighth.

Asked to name "the most problematic factors for doing business" in the U.S., respondents to the WEF's most recent Executive Opinion Survey put "inefficient government bureaucracy" at the top, followed by tax rates and tax regulations.

All this should not be interpreted as yet another prophecy of the imminent decline and fall of the U.S., however. There is some light in the gloom. According to the most recent United Nations projections, the share of the U.S. population that is over 65 will reach 25% only at the very end of this century. Japan has already passed that milestone; Germany will be next. By midcentury, both countries will have around a third of their population age 65 or older.

More imminently, a revolution in the extraction of shale gas and tight oil, via hydraulic fracking, is transforming the U.S. from energy dependence to independence. Not only could the U.S., at least for a time, re-emerge as the world's biggest oil producer; the lower electricity costs resulting from the fossil-fuel boom are already triggering a revival of U.S. manufacturing in the Southeast and elsewhere.

In a functioning federal system, the pace of institutional degeneration is not uniform. America's four "growth corridors"—the Great Plains, the Gulf Coast, the Intermountain West and the Southeast—are growing not just because they have natural resources but also because state governments in those regions are significantly more friendly to business. There are already heartening signs of a great regeneration in states like Texas and North Dakota.

"In America you have a right to be stupid—if you want to be." Secretary of State John Kerry made that remark off the cuff in February, speaking to a group of students in Berlin. It is not a right the founding fathers felt they needed explicitly to enshrine. But it has always been there, and America's leaders have frequently been willing to exercise it.

Yes, we Americans have the right to be stupid if we want to be. We can carry on pretending that our economic problems can be solved with the help of yet more fiscal stimulus or quantitative easing. Or we can face up to the institutional impediments to growth I have described here.

Not many economists talk about them, it's true. But that's because not many economists run businesses."
Summing Up

We have many things going for us, but the government is the biggest thing holding us back
That said, and as always, America's best days lie ahead. But how far ahead is the relevant question to be asked and answered.

To get to that better future which awaits us, we have to start heading in the right direction, and that means limiting government spending. Only by doing that will we will be able to limit taxes and encourage the needed burst of entrepreneurialism and private sector investment to make America's economy perform up to its potential.
As it is, we have huge structural problems which won't be solved with the "tried-and-true" political short term fixes. We've finally reached the tipping point.

Those "tried-and-true-progressive-redistributionist" remedies aren't working this time, and they won't, simply because our fundamental economic problems aren't cyclical -- they're structural.
More government equals less freedom. Less freedom equals less risk taking and private sector growth. Less private sector growth leads to fewer jobs, less income and a growing national debt burden.
That leads all us directly back to the "progressive" playbook calling for more government "assistance." That only makes us weaker.
Let's reverse  course.
Thanks. Bob.

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