Economic Justice and Economic Growth
Is economic growth the highest priority in Obama's Washington? That's not a trivial question: in 1972, the Club of Rome, a global think tank whose current members include Mikhail Gorbachev, issued a report entitled The Limits to Growth, challenging the primacy of wealth creation. In arguments later taken up by President Jimmy Carter, the book's sub-text is that unbridled growth leads to population expansion, but also pollution, resource depletion, famine, and capitalist exploitation.
Reacting to this critique, in the spring of 1979 economist George Reisman published a short book with an arresting title: The Government Against the Economy. At the time, Mr. Carter was pursuing a growth-limiting windfall profits tax on oil companies, and calling for an expansion of price controls on oil and natural gas. Talk was in the air of wider industrial price controls as a way to stem inflation, which had plagued Americans for much of the 1970s - since, not un-coincidentally, Richard Nixon's final abandonment of a gold-linked dollar on August 15, 1971. Mr. Reisman's book was largely a description of the harm and sheer stupidity of such price controls, and the nonsense of any limits-to-growth argument. His larger implicit thesis, though, is one worth pondering today: no matter how well-intended may be the designs of politicians, activist intervention by government often brings about the curtailment of growth, and even, as in the 1930s, disaster and impoverishment.
After a global recession engendered by Federal Reserve policy errors, Fannie/Freddie corruption and incompetence, and harmful legislation in many areas (e.g., bank lending mandates to poor credit risks), one would think Reisman's thesis is beyond dispute: government failure is a reality that can lead to economic hardship, however well-intended the policy aims. Yet gifted politicians and policy intellectuals favoring activist government concede nothing to Reisman. It's important for investors to understand Obama Administration thinking on this - and to analyze whether the current U.S. government is, however ironically, "against" the economy - in order to plan ahead.
Consider some basic facts:
First, the simplest proxy measure for government's involvement in an economy is the metric of government spending as a percentage of total economic output (Gross Domestic Product, or GDP). This *Government Spending/Total GDP* metric isn't perfect, as it doesn't cover other important factors such as tax rates, inflation and monetary stability, the regulatory regime, or levels of human and physical capital. Nonetheless it captures the size of government's "footprint" in an economy to a fair degree. And the first observation here - so prevalent that it may be regarded as a canonical law of economics - is that there is a significant inverse correlation between the size of this government footprint and GDP growth (and, by extension, standards of living). This is true beyond any timeframe other than the very short run. Communist economies, where government's footprint is biggest, exhibited very slow growth across the 20th century. But European welfare states do not fare well, either, in comparison to the growth engendered by the more limited-government policies of, say, Hong Kong, the U.S., or pre-1990 Japan (after 1990, Japanese government spending accelerated dramatically, and economic growth stalled). More recently, the People's Republic of China has witnessed strong growth only as rising economic liberalization, greater levels of foreign direct investment, wider property rights, and significant market-based reforms became policy.
Secondly, in the post-War era, U.S. federal spending, as a percentage of GDP, peaked at 48% in the war year of 1945, then fell back to the persistent low-20% range of recent decades (prior to a sharp increase to 28% in 2009). By contrast, in most European economies the government spending footprint is sharply higher (e.g., *Government Spending/GDP* has been above 60% many times in Sweden, and is 56% there in 2009). Meanwhile, inflation-adjusted economic growth has averaged 3.4% per annum since 1948 in the U.S.; this compares with a range of 1.8-2.7% for the economies in western Europe. Over time, this economic growth differential drives gaps in other such standard-of-living metrics as per capita income, or unemployment. Per capita income in the U.S. was over $44,000 last year, versus $32,000 in France, for example. And, persistently high unemployment levels have become the norm in Europe, often registering double digits in many countries for long periods. Sadly, in 1970 western Europe had 20 million more jobs than the United States; today the U.S. has 25 million more people employed than in Europe.
These differences in economic growth and employment rates have led to a growing gap in living standards not captured fully by the numbers themselves. Tax rates on personal income have generally been lower in the U.S. than in most European countries (though this is changing). And the cost of living, as measured by consumer staples ranging from milk to gasoline, is considerably lower in the U.S., meaning higher American income levels buy even more of the "real stuff" of life. Finally, the U.S. outspends more than the next 9 countries combined on national defense; whether that's for better or worse, it means many countries effectively live under an American defense shield, freeing up billions for welfare spending. Absent this implicit subsidy, higher tax rates to pay for their own security would imply a lower level of consumer welfare and living standards elsewhere, in the sense that "more guns" would mean "less butter" - and this comparative analysis ignores the rather stark differences in quality, service, availability, and convenience between, say, Europe, and a 24/7, please-the-customer-first, competitive culture in America.
Likewise, the rest of the world lives in the back-draft of U.S.-led innovation, entrepreneurial dynamism, technological advance, and capital deepening. The U.S. dominates the scene in private equity and venture capital spending, as well as corporate capital investment. More than one-fourth of all patents are issued in America, and these often comprise the most important and commercially viable over time. At over $300 billion per year, the U.S. dwarfs the rest of the world in absolute R&D spending, with three-fourths of that private sector- or academia-based. And, at a long term average of 2.7%, the U.S. is near the top in terms of the *R&D Spending/GDP* ratio (only a few Scandinavian countries, Israel, and Japan are higher; the European Union is 1.9%, by comparison). Outside of mobile wireless technology development in Japan and Scandinavia, one is hard-pressed to name a significant industrial advance emanating from anywhere other than the United States since 1980. From health sciences to software engineering, electronics, industrial ceramics, basic manufacturing, and countless other sectors, U.S. advances have been proliferated quickly throughout the world after commercialization. This is one reason the U.S. has run a persistent trade deficit; capital has found consistently solid returns here more than anywhere else over time, to the world's enrichment. Combined with continual U.S. innovation in corporate strategy, finance, management methods, and ever-deepening liquidity of capital markets, American technology, research, and know-how all combine to benefit the world via the entrepreneurial dynamism of our private sector.
All this matters for a simple reason: the superior wealth creation and higher standard of living in the United States result with a lighter footprint of government than elsewhere. A corollary of this is that if the United States did not exist - that is to say, if the European welfare states and Japan and others had no ability to benefit from American entrepreneurial dynamism, capital, technological innovation, management methods, or defense and security services - the global standard of living would surely be materially lower. Or to make the same point more realistically, if, since World War II, the United States had had the welfare state economy and growth rate of, say, France or Sweden, the world would be significantly poorer.
This is a seminal fact which President Obama would not deny. But he evidently does not agree that economic growth, based on superior American exploitation of entrepreneurship and a friendlier environment for capital investment, is the most important end of policy. Nor, concomitantly, is wealth generation the most important aim. He has spoken fondly of European health care systems, for example, and laments that the U.S. is the "only advanced democracy on Earth - the only wealthy nation" that does not provide universal health care to its citizens. Likewise he considers Club of Rome positions on energy and climate change to be enlightened, though effecting their policies here in the U.S. will mean hundreds of thousands of job losses and lower industrial profits. Again following the Club of Rome, Mr. Obama recently declaimed at the U.N. and G-20 that there is nothing inherent in the U.S. economic system which could be considered superior to the rest of the world. Given the standard of living differentials described above, this is rather astonishing, but illuminating in terms of where policy is headed.
To be sure, Mr. Obama has occasionally spoken favorably about America's private sector. But for him there is a danger of too little government, just as there is from too much. As he said last month in a joint session of Congress:
"You see, our predecessors understood that government could not, and should not, solve every problem....[B]ut they also understood that the danger of too much government is matched by the perils of too little; that without the leavening hand of wise policy, markets can crash, monopolies can stifle competition, and the vulnerable can be exploited."
This is a critical revelation of Mr. Obama's worldview, and is explanative with respect to current and future policy from this Administration. Economic growth is not the most critical lodestar for public policy, as long as business professionals exploit the "vulnerable" along the way. Further, as Mr. Obama has stated elsewhere, while the Civil Rights movement vested formal rights in such vulnerable, "dispossessed" people, little has been accomplished with respect to "political and economic justice in this society". He has opined as well that a shortcoming of the U.S. Constitution is that it does not enumerate "what the federal government must do" on behalf of people to effectuate "redistributive change".
Therefore there are societal goals to be pursued beyond economic growth which might fall under the rubric of what Mr. Obama has termed economic justice. That is to say, for Mr. Obama, there is an "optimal level" of government intervention in an economy which, far from harmful, can be of great assistance both in the short run of a crisis as well as for longer term resource coordination - and happily, at the same time such intervention can effect "redistributive change" and promote other policy preferences of the governing class, such as on environmental or energy matters.
Even if only implicit, a U.S. government policy agenda which places other goals above economic growth has enormous implications for American taxpayers, investors, and ultimately the world itself. For it portends the imposition of a European-style welfare state economy on the American people, the first result of which is a permanently lowered trajectory for the standard of living here. One of the immediate consequences of this is, as Mr. Obama's chief economist admitted last week, higher unemployment levels for the long term. Higher levels of taxation seem assured, again, for most all Americans - the top 1% of wage earners paid 17% of all personal taxes at the federal level in 1980; today this group pays over 39% of all personal taxes, so "help" must come from lower-income earners. And corporate tax rates in the U.S., already the 2nd highest in the developed world, will see no relief.
Other results of this policy set surely include a weaker-valued U.S. dollar, which puts at risk all dollar-denominated assets, particularly the U.S. bond market. Sharply higher interest rates and inflation are in the offing eventually, and prospects for a bond market collapse cannot be ruled out. All of this implies that on a relative valuation basis, U.S. assets will not yield returns available abroad, especially given the pro-growth policy pursuits announced now in several Asian countries, and most recently Germany. Oil is now at $80 and in the short run will surpass $100, with long term higher price levels in store - Asian demand and U.S. monetary policy will ensure that.
Of course, in the very short run, higher levels of new government spending induce greater consumption, per the present moment. And Mr. Obama is globally popular, as is his agenda for "economic justice". But the world will come to regret that the engine of the U.S. economy is now being shifted to a lower gear, for in time it means the same for them.