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Where's the Growth?

Where's the Growth?

By Francis Cianfrocca - March 28, 2009

The Obama Administration has ridden into Washington at a crisis moment, which has enabled them to say things one never expected to hear in America. They have been bracingly forthright about their willingness to take over large businesses that have received government assistance. And Congress's Democratic leaders, who have never hidden their disdain for private management, have had no one to check their cries, most recently, to modify employment contracts wholesale and impose retroactive salary caps on middle-income people at financial companies.

Keep in mind that the Federal government has long been about 22% of the economy, and Obama has suddenly increased that share to 28%. So you really can't be a large business and not do business with the government. Does that mean every large company, not just failing banks, can now expect Washington to "suggest" changes in how they operate, including what businesses they choose to engage in, and how much they can pay their people?

And how to re-regulate the financial industry so that "this never happens again" is emerging as a key discussion topic everywhere around the world. Meanwhile, the Chinese are loudly hinting that the dollar's days as the predominant reserve currency are numbered.

What's the common theme in all this? It's government activism. There is almost no one who is willing to say that less is more, and that government should first do no harm. The problem with government activism on the economy is that it doesn't provide even a basic case for economic growth.

We've gotten stuck on the idea that capitalism is broken and that government needs to step in and... well, and do something to create the perception that things are getting better in the economy. But in the last analysis, the only thing that government really can do is to modify the incentives faced by private actors. Even the incredibly large and swift pulses of monetary inflation being created by the Federal Reserve do nothing to actually engender new production of goods and services and new employment.

What all of us really want, first and foremost, is to ensure that we have enough today to pay for current needs. Then we want to ensure we can pay for college tuition. Farther out, there's a hopefully-comfortable retirement. Alongside of all that, we want fulfilling work and to experience a few beautiful things along the way. Material prosperity doesn't amount to happiness, but it is indeed a precondition for happiness. The economy's job is to produce enough goods and services in the current period to make it possible for everyone to pursue their needs and wants.

That's where government activism gets into trouble. Government's goal is to stabilize the economic crisis today, and to modify the basic conditions of economic life in the future. To do this produces massive distortions in private incentives in the best of times. Now, even if there were no economic crisis, we'd still face the need to meet the healthcare needs of tens of millions of retiring baby boomers.

In short, we face an extraordinary expansion in the demands on the economy's aggregate production, both from demographics and now from government activism. There is simply one and only one way to ensure all of these needs can be comfortably met. And that's to grow the ability of the economy to efficiently produce more goods and services.

But this is the one thing that our current Administration and Congress are refusing to even consider. They're doing exactly the opposite. By announcing every single day some new plan for "rescuing the economy," most of which are nothing but trial balloons (management by press release), they're making it impossible for businesses to intelligently plan ahead.

By substituting government demand for consumer demand (what is called "stimulus"), they're totally upending the way businesses decide what to invest in. In a government-driven economy, what's the best way to decide what your consumers will buy? You hire lobbyists to go up to Washington and actually write those buying decisions into law. Not for nothing has it been said that Obama, who pledged (mendaciously) to keep lobbyists out of his government, has created a lobbying golden age. Watch for the brightest business-school and law-school grads to start heading for K Street rather than Wall Street.

The problem in all this is that it doesn't amount to a growth story. There is too much uncertainty in a government-driven economy, and too little flexibility, to permit anything but anemic growth. And that will make the next few years, perhaps the next decade, leaner than they would have been. There simply won't be enough new production to comfortably meet all of America's spending demands.

Much of what Obama's people talk about relates to reducing our dependence on foreigners. They want to raise taxes sharply to avoid borrowing from abroad, and they want to tax energy so we'll import less of it. Ultimately, however, we simply will have no choice but to mortgage ourselves to foreign producers of goods and services. We simply won't be producing enough to go around.

I had dearly hoped to make the case for a rejuvenated private economy this year and in the future. I'm now of the belief that business planning will be all about making do with less.

Mr. Cianfrocca is a businessman and investor based in New York City.

This article was originally published at The New Ledger.

Francis Cianfrocca

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