Like a summer houseguest who outstays his welcome, the current economic climate just won’t leave.
That was the recent message when the Labor Department announced that the unemployment rate had ticked up to 8.3 percent. Just days earlier, the Commerce Department reported that America’s gross domestic product is growing at an annual rate of just 1.5 percent, as the debt crisis in Europe and looming end-of-year tax hikes continue to slow the recovery.
This is tough news to swallow, as we have long been accustomed to steady economic growth. From World War II until the current recession, the economy has grown, on average, about 3 percent a year. Occasional slowdowns have always been followed by periods of robust recovery and expansion, leaving most Americans today substantially better off than their parents and grandparents were.
Growth, to most Americans, is simply the natural state of the economy.
As we enter the heat of election season, Americans will find themselves faced with a decision between two theories of economic recovery. One says we should turn to government to provide for the people, to stimulate the economy by pumping money into the system. The other says we should help Americans help themselves, and empower workers by finding new ways to unleash the creative potential of our entrepreneurs.
It’s often assumed that federal spending will stimulate the economy. But there is mounting evidence that it can actually be harmful to economic growth. Half a century ago, economist James Buchanan, who would later win a Nobel prize, pointed out that government policies are often driven not by altruistic motives, but hidden incentives.
Government agencies, for example, have a strong incentive to exhaust their budgets every year, even if they don’t need to. Otherwise, lawmakers might cut those agencies’ budgets the following year.
Meanwhile, firms in the private sector often seek and receive money from the government without creating real value. Dubbed “rent seekers” by economist Gordon Tullock, these organizations seek to profit through the political process, not by producing a better or cheaper product.
In a world of unlimited resources, this would not be cause for alarm. But in reality, the public and the private sectors compete for the same financial and human capital. That is to say, they compete for the same pile of money and the same group of innovative entrepreneurs. So when the government spends a large sum of money – whether for stimulus or otherwise – there is that much less capital in the system for private entrepreneurs.
There is another way that government spending provides a disincentive to private industry. By offering a wide variety of programs from which businesses can profit, not by producing better products but by currying political favor, it drains away talented entrepreneurs who would otherwise put their talents to work in the private economy.
After all, if profits are easy to make in government contract work, why spend the time and capital to develop the next innovation that could revolutionize an entire industry?
There is also a moral dimension to economic growth.
Jobs, of course, mean much more than just an income. They provide value and instill pride. They’re an opportunity to live up to one’s potential – to form the bonds that are vital to thriving in a free society. Merchants must build trust among their customers, and individuals must build a community with their neighbors.
That’s why sustained growth is not just an economic privilege, but a social and moral imperative that enlivens our fellow citizens by freeing them from the economic despair of joblessness. Prosperity provides a better life for millions of Americans and hundreds of millions of people across the globe. There is a virtue to prosperity, as it inspires people, removes pressures that lead to embitterment, and allows us all to step back and get a healthy perspective on what is actually important.
Americans can have the kind of growth we became accustomed to before the Great Recession, but our government must adopt economic policies that nurture – not disincentivize – private entrepreneurship.
The truth is that we don’t yet know how fast the economy could grow on a sustained basis if public policy were lined up with the right incentives. But we do know that a vibrant, strong and free economy makes for a vibrant, strong and free nation. By recognizing inefficiencies in the system and eliminating the transfer of resources from private industry to rent seekers, we may finally find out how fast we can grow.
(Brendan Miniter is senior editorial director at the George W. Bush Institute and editor of The 4 Percent Solution: Unleashing the Economic Growth America Needs, published by Crown.)