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Government Just Keeps Getting in the Way

Government is standing in the way of private sector recovery. Here are some examples...

THE U.S. ECONOMY is struggling. It's no secret why. The government is standing in the way of private sector growth, writes Martin Hutchinson, contributing editor to Money Morning.

Second-quarter gross domestic product (GDP) growth was revised down to 1.0%. That means the economy grew at an average rate of 0.7% in the first half. That's pathetic. 

Keynesians will say that without government intervention, we wouldn't even have seen that meager advance. But in reality, the government's intrusion into the private sector has stunted growth. 

And truly, when you look at the harassment it is suffering, and at the output it is producing, the private sector actually has been remarkably resilient. If only the government would keep out of the way, growth might get onto a decent track during the rest of the year, and at some point people might get their jobs back.

When you look at output of the private sector during the 1930s, its most vigorous recovery was in 1939-40. And it was caused not by any good government policies but simply by the end of bad ones. The Republicans won a huge victory in the 1938 mid-term elections, which did not allow them to make policy but was enough to block the endlessly inventive and expensive experiments of the New Deal. 

That success could be repeated now.

The private sector is still growing, albeit not very quickly. It expanded 1.9% in the first quarter and 1.4% in the second. In both quarters, government shrank slightly, mostly at the state and local level, making GDP growth even more sluggish than gross private product (GPP) growth. 

More importantly, if you consider the handicaps under which the private sector is operating, it becomes clear that the private sector is capable of even more. 

Specifically, there are seven things the government could do to jumpstart the US economy by simply getting out of the way of the private sector: 

1. Back off the banks

The financial services sector may consist of bad guys, but it is a major part of the economy. It has been harangued with legislation of more than 1,000 pages, including instructions to the US Securities and Exchange Commission (SEC) and other bureaucrats to write new, undefined regulations in all sorts of areas.

Additionally, the mortgage business – one of their major profit drivers in normal times – has been subject to endless regulatory harassment and lawsuits. It's tough to sympathize with bankers, but it's also tough to imagine how they can grow their business and flourish under these conditions.

The combined overregulation and coddling of banks has suppressed small business lending to a level 25% below its pre-2008 plateau. Bang go more jobs.

2. Expand the energy sector

Just like with banks, it's tough to sympathize with oil companies. But very few permits have been issued for offshore Gulf drilling in the last year, and exploration in the rest of the country has been shut down.

Now energy companies have devised a wonderful new technique – "fracking" – that has immensely increased US natural gas reserves. Fracking has reversed the decline in national energy self-sufficiency for the first time since the 1970s. It's also created an estimated 140,000 jobs since January 2010. However, the Environmental Protection Agency (EPA) wants to restrict this development. Even New Jersey Governor Chris Christie has gotten in on the act, imposing a 12-month fracking moratorium. 

Sorry, but fracking has the potential to create more value, more national security and more jobs than all the dubious toys of Apple, Google and Facebook combined. A new energy policy of "drill, baby, drill," and "frack, baby, frack" could speed US growth into a brisk trot and it's not being allowed to happen.

3. Clear Boeing for take off

People hate banks and oil companies, but nobody much hates aircraft manufacturers. However, the National Labor Relations Board is attempting to impose sanctions on Boeing for opening a new plant in South Carolina rather than the unionized state of Washington. As a result, billions of investment Dollars are being delayed while lawyers are deployed.

4. Turn the lights back on

Since December, we've been prevented from buying the light bulbs that we've used for a hundred years, and instead forced to buy inferior, much more expensive, foreign-made light bulbs – all for the benefit of a "crony capitalist" manufacturer, General Electric, which has closed its US light bulb plants and moved manufacturing to China.

5. Ease off the brakes

Automobile manufacturers are being forced to increase fleet economy, not just to 35 miles per gallon, but possibly as high as 62 miles per gallon by 2025. Meanwhile, energy prices are rising fast, while hopelessly uneconomic energy sources such as bird-slaughtering windmills, earthquake-causing geothermal powerand famine-producing ethanol are being subsidized.

6. Leaner healthcare laws

A healthcare law of more than 2,000 pages has been enacted, imposing immense new costs and regulations on business, many of them avoidable with better legislation. The healthcare bill also widened the budget deficit and brought huge new uncertainty in the lengthy run-up to its implementation.

A June 2011 survey of 329 large employers by the National Business Group on Health, a Washington-based nonprofit that represents large employers on national health-policy issues, reports that employers estimate their healthcare benefit costs will increase an average of 7.2% in 2012. Another survey from professional services firm Towers Watson said 9% of the midsize and large companies plan to drop employer-sponsored health insurance altogether after the Affordable Care Act takes effect in 2014.

7. Free trade

Congress has held up three trade treaties – two with major trading partners, Korea and Colombia – since 2007. The treaties would bring new growth opportunities. Meanwhile, Korea and Colombia already have signed trade treaties with the European Union (EU) and will focus more of their trade in that direction.

Colombia's ambassador to the United States, Gabriel Silva Lujan, noted that US farmers once claimed 46% of Colombia's food import market. Now the proportion is more like 20% and headed lower. Colombia also is the sixth-largest market for Caterpillar's construction and mining equipment.

Many of these actions have reasonable justifications – after all, more than half of the country voted for the administration that is introducing them. Yet their combined effect has been to suppress growth in the private sector and put us into a permanent recession worse than any since the 1930s. 

The Tea Party victory of 2010 has not had the beneficial effect of the 1938 GOP landslide – much more economic power is in the hands of the bureaucracy these days, and that hasn't changed hands.

Add to this overregulation the adverse effect of the Federal deficit, the uncertainty created by the default threats during the debt ceiling wrangling, S&P's downgrade of the US credit rating, and US Federal Reserve Chairman Ben S. Bernanke's damaging monetary experiments and it's surprising that the private sector is open for business at all.

Still, the private sector data shows that the US economy is poised for growth – if only government would stop hampering it. 

Government as a rule is mostly unproductive, but it could at least try to be less damaging to private sector growth.

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Now a contributing editor to both the Money Map Report and Money Morning, the much-respected free daily advisory service, Martin Hutchinson is an investment banker with more than 25 years’ experience. A graduate of Cambridge and Harvard universities, he moved from working on Wall Street and in the City, as well as in Spain and South Korea, to helping the governments of Bulgaria, Croatia and Macedonia establish their Treasury bond markets in the late '90s. Business and Economics Editor at United Press International from 2000-4, and a BreakingViews editor since 2006, Hutchinson is also author of the closely-followed Bear's Lair column at the Prudent Bear website.

See full archive of Martin Hutchinson.

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