When Government Tries to Stimulate, We Get Stagnation
West Virginia Senator Robert Byrd died in 2010 as the longest serving U.S. senator of all time. While in office, Byrd predictably amassed a lot of power such that he was able to shower West Virginia's citizenry with all manner of government largess.
Evidence of Byrd's generosity with the money of others is all over the state. There's the Robert C. Byrd Highway System, the Robert C. Byrd Bridge, the Robert C. Byrd Expressway, the Robert C. Byrd Federal Building, the Robert C. Byrd Health and Wellness Center, the Robert C. Byrd Institute for Advanced Flexible Manufacturing Systems, along with countless schools, service centers, rest stops on West Virginia highways, etc. Byrd delivered copious amounts of federal spending to the state, but logically did not deliver prosperity. West Virginia remains one of the U.S.'s poorest states, and is a monument to the flawed thinking popular among pundits, economists and politicians that government spending can boost economic growth. It cannot.
Byrd's failures came to mind last week when the Wall Street Journal devoted front page space ("Unkept Economic Promises Drive Stormy Election") to the inability of "U.S. economic leaders" to deliver on their predictions of continued prosperity from 2000 to the present. Then Federal Reserve Chairman Alan Greenspan said at a White House gathering during happier economic times "I do not believe we can go wrong," but as the Journal lamented, "After 2000, the economy would experience two recessions, a technology bubble collapse followed by a housing boom, then the largest financial crisis in 75 years and a prolonged period of weak growth."
Missed by the Wall Street Journal, most economists, and perhaps Greenspan himself, is that government cannot decree or bring top minds together to plan prosperity. Government can only remove the tax, regulatory, trade and monetary barriers to growth. The error of government since 2000 hasn't been a failure to deliver the goods as much as policy errors have increased the aforementioned barriers.
Taxes are a price levied on work and investment, and they've risen since 2000. Regulations don't make businesses safer, but they do distract them from their mission of delivering profits to shareholders. Since 2000, business has suffered Sarbanes-Oxley, Dodd-Frank, and the mis-named Affordable Care Act among many other regulations that have increased the cost of allocating capital, forming businesses and hiring workers, but that have done nothing to enhance productivity.
Tariffs on trade not only tax the purpose of our work (we produce in order to get what we don't have), they also slow the natural migration of human capital to its highest, most productive use. Since 2000 tariffs have been erected on steel, softwood lumber, shrimp, and Chinese tires. Even though Chinese production has given Americans daily raises, China has been fingered as the enemy by many in the political class. Bailouts of U.S. banks and carmakers were tariffs of a different kind.
And then there's the dollar. Whether versus foreign currencies, or a more objective measure like gold, the dollar is great deal weaker today versus 2000. Economists and politicians (including the two presumptive presidential nominees for the Democratic and Republican parties) think a weak currency boosts growth, but since the investors whose capital commitments create companies and jobs are buying future dollar income streams, it's no surprise that they became a bit shy about investing in the 21st century; lighter growth the easy to predict result.
Also missed by the Journal was that "bubbles" wrought by feverish investment (cars in the early 20th century, tecnnology in the late 20th) naturally leave lots of failure (meaning economy-boosting information) in their wake. That's the point. Voluminous investment that brings with it lots of failure is a sign of economic progress. The mistake of "economic leaders" since 2008 (in 2001 they properly got out of the way of a healthy technology bust) has been their aversion to information-abundant error, and their strange desire to fight the corrections that are a market economy's way of fixing mistakes that are suffocating growth. Non-allowance of corrections and failure is non-allowance of success and prosperity.
What all of this tells us is that the mistake of "economic leaders" was that they misunderstood the source of so much optimism in 2000. In the twenty years leading up to then, the tax, regulatory, trade and monetary burden of government shrank such that the private economy that is always and everywhere the source of prosperity had room to prosper. The U.S. economy has suffered too much in the way of false help from politicians and economists since 2000, with predictable results.
Going back to West Virginia, government largess is not the same as investment. While Byrd's spending doubtless enhanced the economic fortunes of the Mountain State's well connected, it didn't erase the truth that capital always goes where it's treated best. With there very little in West Virginia that rates serious investment, government waste in the state enriched the very few who then logically banked and invested the money; those funds having plainly exited the state as its weak economic growth attests.
The same could be applied to Detroit and its environs today. Government spending wouldn't boost Michigan's economic prospects, and neither would Federal Reserve bond buying from banks there. With little to invest in or lend to, government spending and mis-allocated credit would soon enough flow out of the state. Capital is ever in search of talent, yet Detroit presently repels it.
Governments quite simply cannot plan or deliver growth. People can. The U.S. economy has been weak since 2000 precisely because government has been too aggressive about creating what it can't. The "unkept economic promises" since 2000 are a function of politicians and economists trying to do what they plainly are incapable of. Neither the federal government nor the Fed have resources to inject in the economy, which means both can only mis-allocate resources extracted from the private sector. And as West Virginia reminds us yet again, governments cannot change the on the ground economic reality with the money of others. They can just waste it.
A reduction in the size, scope and activity of government is the only path to prosperity. When governments do anything else with growth in mind, they give us relative stagnation as the 21st century U.S. economy reveals in living color.