September 3, 2010

Economy’s Message to Washington: “Just Get Out Of The Way!”

by Hal Gershowitz

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Consider the outrage from the left at such a notion.

That’s the thinking that got us into this mess in the first place,” the President and his lock-step liberal legions will rush to remind us.

Well, no, it isn’t.  The Bush Administration’s general lack of interest in proper regulation, the somnambulistic SEC’s furlough from responsibility during the Bush years and the federal bank examiners refusal to really examine the banks for which they were accountable while a succession of administrations, both Republican and Democrat, committed to the fantasy that credit history didn’t really matter when assessing mortgage risk are not examples of government getting out of the way of a private, market-driven, economy.  These are simply examples of a gross absence of leadership, common sense and the failure to enforce the longstanding oversight rules already in place.

Just as abandoning highway speed and safety laws would cause carnage on our highways as irresponsible and reckless risk takers took to the roads, so did government’s failure to enforce its own rules and regulations attract irresponsible and reckless risk takers into the marketplace.  Had the rules and regulations that were in place been properly enforced, and had the House and Senate financial oversight committees taken their jobs seriously, and had the business and financial press (with a few noteworthy exceptions) earned their subscribers’ fees, the mess we’ve been exposed to for the last three years would (not couldwould) have been avoided.

Economists will debate ad nauseam for many years (and never reach a consensus) whether the Obama stimulus stimulated anything other than massive debt.  We have strong doubts about the efficacy of incurring a trillion dollar debt to improve the economy along with a plethora of new policies and regulations that will add tens of thousands of new bureaucrats (literally) and thousands of new regulations (and the massive taxes needed to fund this circus) on to the backs of businesses and all other taxpayers in the cause of stimulating growth.  Individuals and businesses in the marketplace are what stimulate growth, and, by any measure, the marketplace is ready to grow if government would just allow it properly to operate.

Many American businessmen are, today, at the controls of well-oiled and well-fueled industrial machines, but they don’t know whether to, metaphorically, depress the brake or the accelerator of those machines. And who can blame them. Everything the government is doing portends uncertainty and, indeed, danger ahead.  Bare teeth determination to raise taxes on capital, on dividends on high-quality corporate insurance programs on corporations deemed too successful (that would be all small businesses earning over $250,000) and on the most productive income earners in our society is the order of the day emanating from the White House.  This, while the greatest feeding frenzy of new regulatory rule making has been simultaneously unleashed in Washington. And our new ruling class cluelessly laments the hesitancy that permeates our economy.

The tragedy is that the economy is poised to accelerate.  Consumer confidence is abysmally low because the consumer is focused on government that it sees as amateurish, increasingly radical, and outrageously disingenuous.  After dubbing this the Recovery Summer, and all but celebrating how the stimulus is working miracles creating (or, as they like to say, “saving”) millions of jobs, economic data is released that tell us things have gotten worse not better, that GDP has fallen not risen, that jobless claims have increased not decreased and that housing sales dropped to the lowest levels in fifteen years.  And what does the White House then say?  “Oh, that’s just what we were expecting.”

“Recovery Summer” was the Obama Administration’s absurd stab at “Mission Accomplished.”  Bush was simply mistaken with his foray into the Mission Accomplished imbroglio of 2003.  Obama, however, has been deceitful. He is using the financial meltdown as an excuse to reweave the fabric of American society.  To “transform America” as he put it in the final run up to his election. The result has been a nation with sinking confidence in both the leadership and the future of the country and a business community with a very understandable reluctance to invest the enormous reserve of capital it has accumulated by running lean and replenishing the slowly diminishing inventories of retailers, wholesalers and distributors throughout the country.

It is reliably estimated that American corporations are holding about $2 trillion in cash; the lion’s share of which would ordinarily be earmarked for investment (that is how a business funds its growth), or dividend distribution to millions of shareholders.  The fuel for growth (retained earnings) is available and at record levels. Businesses racked up an unprecedented $1.2 trillion in profits in just the second quarter of the year.  Companies have no reason to just sit on those funds.  Their shareholders don’t want them to do that, their suppliers don’t want them to do that, the marketplace doesn’t want them to do that, and, because low investment will translate to low growth, their employees don’t want them to do that. The raison d’être of any business is to grow by increasing the market for its services.  A government, sitting in Washington, salivating at the opportunity that this crisis has created to raise taxes, write new regulations, create new agencies is exactly what the economy doesn’t need right now…unless, of course, the government wants to be that economy.  It is no coincidence that so many of the tea party gatherings all over the country consist of middle income, small businessmen and women.  They get it.  It is their elected representatives in Washington and their President who don’t.

The biggest stumbling block to growth is, sadly, government.  The economy would be picking up steam more briskly if government wasn’t looming in the background busily concocting new taxes and volumes of new regulations.  Government should be encouraging dividend distributions, especially by more mature companies, but, instead, the Administration intends to levy new taxes on dividends, nearly tripling the tax rate on dividends for some taxpayers.

Then there is the proposed Obama tax on capital gains, dampening economic activity and most certainly, thereby, reducing tax revenues that would otherwise flow from those transactions that involve the sale of appreciated assets.

Every indication is that the economy wants to grow.  Businesses and households aren’t looking over their proverbial shoulders to see what the Wall Street bogeymen are about to do to them.  They are looking over their shoulders to see what their government is going to do to them.

So far, they don’t like what they see. A trillion dollars spent so far from which few people in the private sector have benefited. The wasted razzle-dazzle of billions spent on cash for clunkers, temporary tax credits for home purchases (which ultimately produced the largest decline in home purchases in fifteen years once the government interference (Washington called it stimulus) was lifted, money shoveled into all those shovel-ready projects most of which were not shovel ready and the no-strings attached largess that flowed to bloated local and state governments who were able to kick the day of reckoning down the road far enough for our children to pay the tab, and what do we have to show for all of this is, mostly, massive new indebtedness to the Chinese and heaven only knows who else.

So, what to do?  The answer is, in our opinion, not all that complicated. Government should just let the private sector operate with some sense of certainty. Government officials should stop berating the business sector with claims that business people are motivated merely by greed, which was the president’s outrageous claim when GM bondholders wanted simply to maintain the priority, ahead of unsecured creditors (e.g. organized labor) to which they are entitled by law.

Government should listen, for a change, to what the country is telling it. The people can’t wait until November to send a message the only way they can in a republic such as ours.  The government should recognize that now is the time to leave as much of the nation’s capital and financial resources with the people and stop moving to vacuum those same resources into federal coffers for redistribution as they see fit.  That means easing up on marginal tax rates for all enterprises engaging in productive commerce, and on all incomes whether individual, C-corporations, S-corporations or investors willing to take risks on American business. As Kevin Hassert, director of economic policy at the American Enterprise Institute and AEI resident scholar Alan Viard wrote in last Friday’s Wall Street Journal (September 3, 2010), “according to IRS data, fully 48% of the net income of sole proprietorships, partnerships and S corporations reported on tax returns went to households with incomes above $200,000 in 2007. This is the real impact of the Obama tax plan on small business, not the disingenuous 3% to which the administration dismissively refers.

Perhaps as the Journal points out, Tony Blair provides the greatest clarity on the subject in the final chapter of his recently released book, “A Journey.”  Blair writes, “First, the market did not fail.  One part of one sector did.”  He goes on to write,” Government also failed.  Regulators failed. Politicians failed. Monetary policy failed. Debt became way too cheap…the failure was one of understanding.  We didn’t spot it…it wasn’t that we were powerless to prevent it even if we had seen it coming; it wasn’t a failure of regulation in the sense that we lacked the power to intervene.  Had regulators said to the leaders that a huge crisis was about to break we wouldn’t have said” There’s nothing we can do about it until we get more regulation through.  We would have acted.” And so the message for America really seems to be to just enforce the sound and healthy regulations that have been there all along to assure a fair and even playing field and then just plain get out of the way.

The President and the Congress have a very short time left to do something that makes sense to virtually everyone except those that are committed to centralized planning and control of the economy.  President Obama, it seems, wants to be remembered as a sort of knight in shining armor, who rescued a people that didn’t need rescuing.  Instead, it would appear that he will be remembered more as the knight of the woeful countenance, a Don Quixote of American politics.

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