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Digging Out

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Pundits are full of advice about how and how not to pull the country out of its financial morass. Rebuild infrastructure or cut spending, increase deficit spending or reduce the debt, raise or lower taxes, regulate or deregulate, implement a new industrial policy or get government out of the economy, open the monetary floodgates or end the Fed’s easy-money policies. Every prescription has its advocates and its detractors. The one thing the experts seem to agree on is that we need “growth,” but they disagree on what to grow and how to grow it. Who is right, who is wrong, and why?

Infrastructure

A computer cannot run without its software infrastructure, or “operating system.” But decades ago, Apple learned that customers want more from a personal computer than a great operating system — they want to be able to run lots of great programs. For many years, Apple kept its goose from laying any golden eggs by regulating it to death. The company severely limited the software that could be run on its machines and sealed the computer cases to keep users from tinkering with the hardware. In the end, Apple couldn’t compete with Microsoft — despite the latter’s inferior operating system — because Microsoft left its software open to both customers and innovators.

Similarly, economies cannot run without infrastructure — roads, bridges, power lines, sewage and water systems, data networks — but it is the people, goods, and information that use that infrastructure which are the real heart of an economy. And if the government regulates goods and services into extinction, no amount of idle, empty infrastructure will keep the economy going.

During the Great Depression the government funded 700,000 miles of new and rebuilt roads along with thousands of bridges, airports, hospitals, schools, and parks. None of this was enough to lift the economy over the economic roadblocks created by the New Deal. The economy recovered only when World War II ended and interventions such as price and wage controls were abolished.

The postwar recovery shocked Keynesian economists who believed the depression would return with a vengeance when the federal government stopped spending vast sums on munitions and when 10 of the 12 million men and women in uniform came home and flooded the job markets. Instead, the economy, freed of its government-forged shackles, soared even as federal spending plunged from 42 percent of GDP to below 15 percent during the two years following the war.

Austerity

Depending on who is using it, the term “austerity” has different meanings. Typically, however, it translates into reduced government spending and higher taxes with the goal, presumably, of cutting deficits. But the goal during a slump should be to get the economy going again, and as pointed out above, the heart of a nation’s economy is its productive sector. The first half of the austerity equation, lowering government spending, should free up capital for private industry by reducing government competition for scarce goods and labor. But the second half, higher taxes, prevents industry from employing the freed resources.

Regulation

Michael J. Mandel, chief economic strategist at the Progressive Policy Institute, compares government regulations to pebbles in a stream. As no single pebble will affect the stream’s flow, no single regulation will discourage innovation and economic growth. But throw enough pebbles, and eventually a dam is built. Similarly, “add enough rules, regulations, and requirements,” and investment stalls.

During a 2011 fundraiser in San Francisco, Obama chided the nation: “We have lost our ambition, our imagination, and our willingness to do the things that built the Golden Gate Bridge.” The bridge was built in just over four years between January 1933 and April 1937. Today, new construction projects of all types are routinely delayed for years and sometimes decades as companies hurdle local, state, and federal restrictions.

The Competitive Enterprise Institute calculates that new regulations issued by the Obama administration in 2012 will cost the country an additional $216 billion a year, bringing the annual total cost of regulation to well over $1.8 trillion. The economy is increasingly guided by legislation and regulations rather than by market feedback and signals. More and more of industry’s resources are expended in navigating political and bureaucratic mazes rather than in serving customers.

Industrial policy (“crony capitalism”)

Large companies can typically run through those regulatory mazes more adeptly than can their smaller rivals, and big corporations often lobby Congress to increase regulation in order to gain competitive advantage. Because of such advantages, the high compliance costs of Dodd-Frank and its designation of “systemically important financial institutions” will likely cement “too big to fail” in place.

In Obama’s world of activist government, the payouts for congressional lobbying are quickly rising relative to investments in physical and human capital.

Companies have learned that investing in Washington can produce big returns, and some of the best returns can now be found in the world of “green energy.” Despite the failures of companies like Solyndra, Evergreen Solar, SpectraWatt, and Solar Trust, Washington continues to pour billions of tax dollars into solar energy. The power generated by government-subsidized technologies is far more expensive than that produced by their more conventional rivals. Individual and industrial consumers are hurt by the higher prices, the taxes to pay for the subsidies, and the opportunity cost of expending scarce resources and labor on such boondoggles.

Moreover, the government-mandated global warming “solutions” — ethanol, wind, and solar — have likely increased CO2 emissions. Ethanol production means more farmland and fewer trees. It also means that CO2, long trapped in the soil, is released into the atmosphere during plowing. Windmills and solar collectors may well take more energy to build, transport, and install than they will ever
produce during their useful lives. The main reasons that CO2 emissions are down in the United States are the economic downturn and a market-driven switch to low-cost natural gas.

As John Mackey states in his book, Conscious Capitalism: Liberating the Heroic Spirit of Business,

Crony capitalists and governments have become locked in an unholy embrace, elevating the narrow, self-serving interests of the few over the well-being of the many. They use the coercive power of government to secure advantages not enjoyed by others: regulations that favor them but hinder competitors, laws that prevent market entry, and government-sanctioned cartels.

Instead of expending tax dollars, resources, and labor trying to create industrial winners and losers, Washington would do far better to assume the role of “honest broker,” treating market entrants equally under the rule of law.

Easy money

Over the last few decades, the Federal Reserve has launched a series of boom-and-bust cycles with its inflationary policies. New money enters the economy and creates investment bubbles. The bubbles burst, and rather than let the markets shift labor and resources into more sustainable areas of production, the Fed pours in still more money. Hoping to lift the economy out of the recession following a bust, the Fed merely creates yet another boom-and-bust cycle.

Alan Greenspan and his successor, Ben Bernanke, played this same tired game after the dot-com bubble, after 9/11, and after the housing crisis. Now, a series of “quantitative easings” is setting us up for the next bust — perhaps this time in government paper. Rather than a stable economy, the legacy of these serial bubbles has been an unmanageable federal debt and a debased currency.

A country simply doesn’t run on small, rectangular pieces of green paper. Ultimately, someone has to actually produce something. But instead of fostering productive investments, the current loose monetary policy seems to be driving investors to purchase hedges against inflation such as gold, silver, platinum, and diamonds.

The New Deal, the new New Deal, and the real deal

Economist Robert Higgs has persuasively argued that the Great Depression was prolonged because uncertainty about federal policy caused investors to sit on their money. Franklin Roosevelt’s constant experimentation combined with verbal and legal attacks on businesses and businessmen stifled entrepreneurial risk-taking. Even though a few favored companies became beneficiaries of government largess, overall the business environment remained crushingly hostile.

Obama’s administration has echoed Roosevelt’s policies during the recent economic downturn, with similar results. Whole industries are being bombarded with taxes, regulations, lawsuits, unstable currency, and verbal attacks, while campaign donors and favored companies receive bailouts, tax breaks, and grants. The rule of law has been replaced by executive fiat. As a result, capital either sits on the sidelines or flees overseas.

Necessities

Congress and the president must stop the spending that is soaking up goods, services, and labor, and crowding out both consumers and producers; stop the high taxes that are discouraging capital formation; stop trying to pick corporate winners and losers; stop bailing out financial institutions; stop the regulatory machine that is destroying innovation and misdirecting labor and resources; and, most of all, stop manipulating the nation’s currency.

This article was originally published in the October 2013 edition of Future of Freedom.

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    Richard W. Fulmer is a free-lance writer in Humble, Texas.