Achieving growth

Warren Meyer:

Here is my first law of economic growth: When we encourage more investment, and ensure this investment is being channeled to the most productive uses, growth will follow.

For all the talk about fiscal stimulus and jobs creation at the federal and state level, almost no one in government is doing anything about reducing the roadblocks to investment. For example, millions of people are newly unemployed, and in past recessions a large number of these folks have eschewed looking for a new corporate job and have started businesses of their own.

Unfortunately, such prospective entrepreneurs will face a tangle of registration, regulatory and licensing hurdles, many of which have been backed by established businesses that want to avoid just this kind of new competition. Even steps like the extension of unemployment benefits tend to discourage such entrepreneurship by increasing the opportunity cost of working for oneself.

No one in government, that I have heard, has even suggested any sort of regulation holiday as a potential economic stimulus program. In fact, most of the legislative moves at the national level have made private investment less attractive. Business people making investments today have to plan for higher labor, energy and borrowing costs due to a series of 2,000-page pieces of legislation that few if anyone fully understand (or have even read).

Capital gains tax reductions will almost certainly expire next year, and most business people who look at looming government deficits have to assume these shortfalls will be closed the same way they always have been closed: With new taxes on the backs of the most productive.

Rather than attempting to make investment easier, almost all government stimulus efforts to date have focused on trying to better optimize how and where investment capital is deployed. The core assumption behind all of these programs is that a few people in government can invest money more productively than the private entities from whom the government took the money.

This is dead-on. Almost all discussions which take place in Washington on the economy have a Wizard of Oz quality about them, in which a series of levers and pulleys (interest rates, government spending, targeted tax breaks) are manipulated to produce economic growth. It's a top-down approach in which a number of economists in awe of their own intelligence and aided by politicians eager to dispense taxpayer money and tax breaks to favored constituencies, claim to know what ails the economy and which macroeconomic tonics can revive it.

One prime example of such central planning and the empowerment of a learned few is Alan Greenspan's tenure as Chairman of the Federal Reserve, who regularly pored over reams of data -- including, perhaps apocryphally, vacuum cleaner sales in Iowa -- in his effort to set the proper interest rate. Last year's stimulus package was another example, with its mish-mash of tax breaks, transfer payments and any number of spending initiatives presented as the necessary medicine to heal the economy.

All of these measures -- a tax break for this activity, transfer payments to that group, a spending program to benefit this particular industry, etc. -- are premised on a belief that government can allocate resources more effectively than the private sector.

We know, however, that to truly tap knowledge of the economy we must look not to the master's degree-wielding denizens of DC, but the millions who populate the marketplace. It is their collective intelligence that knows how to best deploy economic resources to their most productive use. The real task for Washington then is to eliminate the obstacles which prevent markets from functioning most effectively. In other words, government. Ronald Reagan captured this nicely in his inaugural address:

In this present crisis, government is not the solution to our problem; government is the problem. From time to time we've been tempted to believe that society has become too complex to be managed by self-rule, that government by an elite group is superior to government for, by, and of the people. Well, if no one among us is capable of governing himself, then who among us has the capacity to govern someone else?

Every new regulation handed down from Washington, and every new tax imposed, constitutes a new burden on the private sector. One less reason to start a business, one less reason to hire a new employee, one less reason to invest in a new piece of equipment. If our politicians are actually serious about promoting economic growth they need to start by paring back the regulatory thicket and reforming an out of control tax code (I've even presented some ideas of my own).

Thus far, however, they have proven content to pile on new regulations, engage in deficit spending which has reached well over $1 trillion, stand pat in the face of looming tax hikes, and scratch their collective head over why the economy is not improving more quickly.

Update: It looks like Sam Staley read my mind:

Reading the reports on the strikingly anemic growth of the U.S. economy during the second quarter (just 2.4 percent), I thought of Khrushchev’s 1956 admonition, “We will bury you.” In the 1950s, economists in both the Eastern Bloc and the West believed that policymakers could pull some levers and push some buttons in the economy and — presto! — produce economic growth. Of course, policymakers couldn’t and didn’t, and it was the dynamic, innovative, entrepreneurial economies that buried the planned ones.

Alas, it seems we’ve backtracked to those same naïve models, which ignore the importance of entrepreneurship, economic discovery, and risk-taking as drivers of real economic growth.

Yep.