Sunday, June 10, 2012

Will U.S. economic recovery require a change of direction?

Published in The Tennessean, Sunday, June 10, 2012 and Forbes with archives.

by Richard J. Grant

During much of the past four years, the conventional political narrative seemed to assume that Newton's First Law of Motion applies to the economy. The repeated insinuation was that, “An economy in recession will remain in recession unless acted upon by the outside force of government.”

Such a belief on the part of the electorate serves well a president who takes office near the end of a recession. Even if that new president does nothing and manages not to create too much uncertainty, economic activity will recover naturally. The new president would then be associated with the recovery. But to be sure that political credit redounds to the president, a few innocuous policy actions – call it “stimulus” – could be enacted.
That is what President Barack Obama threw away. Instead of doing as little harm as possible, or removing the already existing policies and regulations that hinder economic activity, he expanded the power of government to make demands on our economic lives. Taking advantage of Democratic Party majorities in both houses of Congress, he pushed through the incomprehensibly large health-care and financial policy reforms – neither of which will prove to be better than innocuous.
Both of these reforms have created regulatory entities that are self-replicating and open-ended. It is now far more difficult for businesses, let alone individuals, to plan for the future. Although uncertainty is a natural part of life, the size and scope of these new regulatory intrusions will drain resources into compliance efforts and raise the cost of both medical insurance and financial prudence.
We cannot even be sure what our tax rates will be next year. The recent health-care reform imposes new taxes as well as other possible fines and burdens, and the Obama administration is pressing for increases in at least some of our income-tax rates. This is what makes the uncertainty of the Obama era qualitatively different from that of better-performing previous administrations.
Professor Robert Barro of Harvard University and Stanford's Hoover Institution has compared recent economic growth rates to those of previous administrations since World War II. He notes that current growth rates are significantly below the long-term average of 3.1 percent and suggests that it is not unreasonable to expect above-average growth during a recovery. GDP growth has averaged only 2.4 percent during the last three years, and in the first quarter of 2012 was only 1.8 percent. Mr. Barro concludes that this low growth means that “the U.S. economy has actually been falling further and further behind the normal trend. Therefore, it is not a recovery at all.”
To Barro, the recent recession and financial crisis is no excuse. He notes that deeper recessions usually yield faster recoveries and, although real estate crashes are associated with slower recoveries, current growth rates are still well below what would be expected.
Barro believes that the Obama administration does not understand the importance of individual incentives and that its policies have served to raise the cost of work. Also, its Keynesian-style demand stimulus and attempts at industrial policy have failed. Instead, he suggests, the government should “get its fiscal house in order and make meaningful long-term reforms to entitlement programs and the tax structure.”
This translates into a lower tax burden, a lower regulatory burden, and greater clarity about future government policies. But the Obama administration persists in taking us in the opposite direction.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

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Copyright © Richard J Grant 2012