The Slow Recovery

Writing in Barrons over the weekend, Gene Epstein examined the slow pace of the US recovery since the official end of the recession. The annual growth rate as been 2.4% since the recovery began as compared to 5.1% and 6.3% after other serious recessions in 1974-5 and 1981-2 respectively. In fact, for the period since 1970, even including all the recessions during that time, growth averaged higher than just during this recovery alone. This shows the weakness of the current recovery since growth historically is fastest in the period just after a recession. Epstein even does an analysis that removes both the slow housing market and the increase in government spending as a share of GDP and finds that the rate of growth is still anemic compared to the past. So what has caused this slow growth? Epstien says he is awaiting further figures but suspects that it is government policy which is interfering with economic freedom.

In my opinion, Epstein is onto something, but he is also missing an important element of the story. The recent problem has not only been government policy which has restricted the ability of businesses to function; it has also been the used of the government to misdirect investment into non-productive or less efficient parts of the economy. Investment is the life blood of the economy, and there is a finite pool of capital that is available for that use. To the extent that a substantial portion of the available capital is diverted to non-productive investments, economic growth will be slowed or even stopped. And this is just what has happened under Obama.

Let's look at the record. Here are a number of places where Obama's agenda has distorted investments in the USA.

1) The stimulus took about 200 billion dollars and used it to pay salaries of state workers. In the bastardized Keynesian attempt at analysis that passed for the theoretical underpinnings of the stimulus, Obama and his staff told us that this spending would have a multiplier that would increase economic activity. The truth is that the same amount invested by the private sector in productive activities would have caused growth many multiples of the trickle that resulted from paying for the state workers. In essence, Obama used a fifth of a trillion dollars to subsidize inefficiency rather than to promote growth.

2) The stimulus also used close to a hundred billion dollars to make grants for research or for projects like high speed rail that are not capable of supporting theselves in the economy. In other words, high speed rail cannot even operate at a profit so it is clearly an inefficient use of capital. Similarly, studies of the sex lives of coeds at Syracuse will not lead to economic growth.

3) Obama let the EPA put in new regulations that forced utilities to retrofit plants. Remember, America's power plants have already removed over 98% of all pollutants from their emissions in the last 40 years. The new regulations, which will cost tens of billions of dollars, will not result in significant further reductions in pollution, but they will divert the power industry from taking steps that might otherwise reduce the cost of power and increase the rate of economic growth.

4) Obama put tens of billions of dollars into General Motors and Chrysler and then let them go through bankruptcy. Then, in the bankruptcy, Obama strong armed the bond holders into giving up their rights in favor of the unions. Clearly, if bankruptcy was the inevitable outcome for these companies, there was no need for the government to use up 60 billion dollars prior to that happening. It was just throwing good money after bad. Further, by strong arming the bondholders, Obama weakened the rule of law that ought to have protected those assets. This means that the cost to raise capital went up due to the increase of risk that resulted from this action.

5) Obamacare, Dodd-Frank and the rest all put an increased level of uncertainty and fear into business decisions. This tended to freeze investment capital in place. Rather than making investments, people held onto their capital until they see the dust settle. Fear is the enemy of investment. This alone has resulted in a marked slowdown of growth.

There are many other examples that could be listed here. The point, however, is that president Obama owns the slow recovery, not just because he happens to be president while it is happening, but rather because to a great extent it is the direct result of his policies.