Imagine the Lone Ranger galloping over the horizon, confident that he and his sidekick Tonto will face down any evil before them with nothing more than a white stallion, silver bullets, and a healthy dose of moxy. If the villain is our stagnant economy, then who are our heroes? Obama and Biden? Bernanke and Geithner? Boehner and Ryan? Romney and Perry? Oh, hero! Wherefore art thou? The American people await a politician to save the day!
Alas, America, our wait continues. A quick check of the United States Constitution (©Copyright, 1789, Philadelphia, Founders Press) confirms that it does not empower Congress, the President, or their appointees to stimulate the economy. Repeat: It is not in the federal government’s job description to stimulate the economy. Indeed, using the word “stimulate” in political discourse in early America could have earned one a bucket of tar and bag of feathers. The notion that federal officials are responsible for being the SOURCE of economic growth rather than its regulator and partial enabler has evolved under the 20th and 21st century leadership of both parties. It is not an original notion.
There are several limitations on federal economic stimulation, including:
Limitation One: No Carlyle for Congress
While private equity partners make hefty contributions to Congress to ensure their tax advantaged status (another Commentary for another day), Congress cannot legally become a private equity partner. Congress as a body cannot launch a for-profit venture, cannot issue stock, or buy into corporations. When Congress has blurred that boundary (think Fannie Mae and Freddy Mac), it has not gone well; the resulting organizations have functioned much more like conflicted bureaucracies than thriving businesses. Their net economic impact (Additional Economic Good minus the cost to manage, sustain, and rescue said entities) reflects a poor rate of return for America the investor.
By extension, “economic stimulus” programs sponsored by government agencies acting on behalf of government officials are prone to corruption, mismanagement and ultimately, misallocation of resources. Quite simply, the federal government is not intended to be in the business of business. Government and business are the same in Russia, China, Iran, Singapore, Syria, Myanmar, and many others; however, these countries are not representative democracies. We are.
Limitation Two: You Can’t Make the Horse Drink
The Federal government can bail out General Motors or Bank of America, but cannot force consumers to buy their products. Contrary to state-controlled economies in other countries, in the American market economy even government backed companies such as banks and auto manufacturers must eventually compete in the marketplace. The government can’t—and shouldn’t—force a consumer to spend money on the products or services of the companies that the government thinks should be in business despite themselves.
Congress can manipulate that marketplace through instituting tariffs or abolishing free trade agreements, bowing to the demands of specific special interests while creating a net negative impact on consumers by artificially increasing prices and/or reducing the quality of goods and services. Such manipulation hurts the consumer and thus the economy.
Limitation Three: The Government Does Not Create Jobs
Okay, let’s acknowledge that the government creates government jobs, but those are 100% paid for by current government revenues (formerly known as “taxes”) and future government liabilities (still known as “debt,” but likely to have a new name once the PR folks get on it). Since every penny paying for a public sector job is a penny taken from the private sector, it is hard to argue effectively that such a fund transfer is enhances the long-term sustainability of the economy.
A president, for example, can initiate job training programs or marginal incentives such as a reduction in employment taxes; however, nothing the president does can compel a company to hire people. The U.S. President, regardless of party affiliation, can seek to influence job creation, ask for it, scream and pound the table for it, promise it, pray for it, and otherwise strive for it. The government can make it harder to hire people, more expensive, scarier, and riskier; however, the government will not reduce unemployment in a sustainable or cost effective manner. It’s not in their job description.
Actual job creation will only occur when businesses decide they need to hire people and can afford to do so.
Limitation Four: It’s Not Their Money
The Federal Reserve has one primary tool—the ability to set target lending rates between banks and the Federal Reserve. They have used that tool to keep interest rates low. This certainly helps keep low the US debt service cost (whew!), but also is intended to stimulate credit markets (borrowing and lending). This has not worked effectively and will not have the impact implied in press releases. The Federal Reserve cannot make banks or private investors lend money, nor can they compel consumers or businesses to borrow money. Credit is a function of confidence and desire, not just interest rates. People and businesses borrowed heavily prior to 2008 when rates were in the 5-15% range; they are not borrowing now when rates are half as much. It doesn’t matter if your last name is Bernanke or Greenspan or Volker—no Fed Chief can make people lend or borrow.
Limitation Five: Market Manipulation is Not a Long Term Strategy
The Fed has more recently evolved to become the world’s largest de facto bond manager with a $2.9 trillion fixed income portfolio. By comparison, the largest true money manager, PIMCO’s Total Return Fund, has “only” $200 billion AUM. Bernanke beats Gross by a factor of 15. The Fed has used that position and its accompanying bully pulpit to manipulate interest rates and bond valuations across sectors, currencies, and regions. While some argue that it is perfectly appropriate for the Fed to become the primary driver of bond market valuations, it was not originally imbued with that power and it is not clear that such activity can or will materially benefit the long-term economy.
Limitation Six: It’s All About (Un)productivity
When federal officials strive to stimulate economic activity by borrowing heavily to finance infrastructure (i.e. FDR) or defense build outs (i.e. Reagan), they may foster near-term gains for some including the elected official, but rarely contribute to a more sustainable economy. For example, while Reagan’s defense spending put the pincers on the USSR and helped revitalize aspects of the American economy, it also relied heavily on federal debt that we still pay for today. In hindsight, those efforts launched a thirty-plus year gorging on debt-financed government intervention that has shown no sign of abating.
If local taxpayers and businesses believe in investing in their infrastructure after doing a careful cost-benefit analysis, they will do so. A jobs program should not cost $150,000 per $50,000 job. A defense department should defend, not be used to keep people inefficiently and thus unproductively employed. It never works long-term. The federal government was shaped to provide basic protections and to NOT interfere with basic freedoms. When it steps outside of that narrow mandate, it is not productive.
“We have met the hero…”
There are schools of economic thought that would attack every assertion made herein, and we recognize that some earnestly believe that the role of the federal government should be to save us from economic uncertainty, though such powers were not granted in the Constitution or implied in either the Federalists or Anti-Federalist papers. One has to turn to Marxist and Fascist state planners to find justification for such a path.
But this discussion is not about Constitutional interpretation of governance; rather, it is a discussion about what kind of society we want to have. Do we want a society where people await rescue by others or one in which people take responsibility for moving themselves and each other forward? Do we believe that elected officials and bureaucrats can “control” or “plan” the economy better than business leaders and consumers? Pogo once remarked that “We have met the enemy and it is us.” We would argue the contrary—that “We have met the hero and it is us.”
Political leaders cannot turn around the American economy. Citizen leaders can. Political leaders will not rescue the American economy; citizen leaders will do so, as they have done since this country was born.
As in times past, this economy will be healed by those entrepreneurs who invest in their businesses by hiring talented people, creating new or better products and services, and acquiring or developing next generation technology and machinery. In every era of slow growth, there are those who are committed to an idea and possess the leadership qualities to make it into reality. Some may feel that America has lost that hunger, that edge, that desire, but such fear has been afoot since the late 18th century. Every generation thinks it was better before, and yet every generation has gone on to create new growth and discover new possibilities. In free societies people with entrepreneurial drive can thrive, and in their effort and success inspire and enhance others.
People who further their education and ability will stimulate the economy by becoming more valuable to businesses or creating their own. Complacent job-seekers will not do well, but that is to be expected and indeed is well-deserved. Our founding documents did not guarantee a job to anyone; they framed America as a land of in which one was free to work in any state at any job for any company one wished or to create one’s own. This revolutionary concept remains shockingly rare in a global economy in which millions are locked into grinding economic prisons.
The competitive landscape will not get easier, educational requirements will increase, the need for thoughtful employees will grow, and the global employment marketplace will become more competitive. Those who see this as a problem have a problem; those who see this as an opportunity will have better opportunity.
Responsible and Opportunistic Lenders
Banks may be reluctant to lend because of the regulatory environment, poor balance sheets, or their risk-averse business models; however, there remain financial intermediaries who recognize both their responsibility to serve their community and the opportunity to be a part of creating new wealth. Banks that simply nurse their wounds for the next decade are on the way out anyway and quickly will be supplanted by those institutions that participate in enabling new ideas.
If formal banking institutions fail to step in, there will be private investors who would rather put their capital to work than have it earn less than 1%. Why will these people still want to finance business ventures? Because we are a culture that has attracted people from all over the world who are drawn to the possibility of creating new wealth and opportunity for themselves, their families, their employees, and their communities.
Polls indicate that Americans are frustrated by the lack of statesmanship in Congress and among those—vying to be elected president in 2012. This challenge has plagued American life since our inception. No recent campaign has been as ugly as that waged between Thomas Jefferson and John Adams in the first contested election in 1800, yet America went on to greatness. Study the details of any election, any Congress, and you will find gridlock, animosity, maliciousness, and embarrassingly poor governance. And yet we never have had a dictatorship, never have swung into full blown socialism or fascism, and have gone from strength to strength. While we may lack it in the District of Columbia, statesmanship has been abundant in the local communities that define American life, among business and civic leaders and ordinary citizens doing their part.
It is high time for citizens to stop playing into the media-driven frenzy of fear, anger, hopelessness, and despair. Unplug the TV, turn off talk radio, stop reading blogs (except this one), and get to work.
Never have ordinary citizens had such an opportunity to help heal and grow a country, not just by electing one person or another, but by using our collective ingenuity and diligence to create goods and services that are worthy of our friends and neighbors at home and around the globe. Enough of the whining. There is no Lone Ranger coming to the rescue on the back of a white donkey or white elephant. There are no silver bullets. And there is little the government can or should do unless the people of this nation are ready and willing to lead rather than follow.
It may seem crazy, but I am hopeful and appreciative of the opportunity we all have to serve each other, our country, the broader global community, and the generations to come.