Monday, July 23, 2012

“The Economy Will Grow, If It’s Allowed”

Sydney M. Williams

Thought of the Day
“The Economy Will Grow, If It’s Allowed”
July 23, 2012

Five years ago, conventional wisdom held that the world might have 50 or 60 years worth of gas. Today, with the discovery of shale gas and the technology to extract it, expectations are that we have 200 years or more. That change indicates, first that we should always be suspect of conventional wisdom and, second that we should never underestimate the creativity of the individual.

As the Economist noted in a Special Report on July 14, it is not only America, but countries around the world – some in Europe, China, Argentina, Brazil, Mexico, Canada and some African countries – that are sitting on unknown quantities of natural gas. Technology that allows for deep-water and horizontal drilling and high oil prices have transformed the outlook for energy. It has taken companies and individuals risking their assets and reputations to find alternative sources. What has not been responsible for the abundance of new gas discoveries is government. In fact, the Obama Administration has done what it could to restrict development, yet Mr. Obama has not been shy about taking credit for recent increased production.

Two hundred years of reserves is a long time, but it is a blink in the history of man. Homo sapiens, according to Edward O. Wilson, in his book The Social Conquest of Earth, first walked out of Africa 60,000 years ago to become the ancestors of us all. And, of course, the earth’s history dates back hundreds of millions of years before that. So, unless one assumes that man’s life on earth is coming to an end, at some point we will have to develop renewable sources of energy. The best way for government to help is to encourage and incentivize individual entrepreneurs, but, in the meantime, we have some breathing room.

Peter Diamandis, a futurist and entrepreneur with degrees from Harvard and MIT, recently wrote Abundance: The Future is Better Than You Think. The book was recently reviewed by Doug Hornig of Casey Research. It focuses on technology that is already here, like Aeroponics, which has demonstrated that it is possible to suspend plants in midair and deliver food through a nutrient-rich mist. Farms no longer will have to rely on horizontal fields of rich soil. They can be built vertically. This is not pie-in-the-sky stuff. The technology is almost thirty years old. Nine years ago Dean Kamen, a physicist and entrepreneur who had been working on the problem of getting sterile water to dialysis patients, developed a machine (the Slingshot) the size of a small refrigerator that with a power cord, intake and outflow hoses can produce 250 gallons of water a day. The intake hose can be placed in anything damp, from seawater to latrines. The technology used to purify the water is similar to that used by drug companies and desalinization plants on naval vessels.

Housing, which typically has led us out of recessions, has been a drag this time. But the bloated inventory has been worked down, and with rental rates increasing, housing starts should become a positive contributor to economic growth.

Despite these developments, economic growth has been anemic. The Economic Cycle Research Institute (ECRI) gauge shows the eighth straight week of negative reading. Unemployment is higher than it was four years ago and our debt and deficits are both larger. Interest rates are lower, but that reflects Federal Reserve activity. From a fiscal perspective, what the government has been doing is not working. The stimulus program did not stimulate. You must recall President Obama admitting a year ago last June that shovel-ready projects “were not as shovel-ready as we expected.”

The Administration and Congress have left it to the Federal Reserve to do all the heavy lifting. A few days ago, Senator Chuck Schumer responded to Fed Chairman, Ben Bernanke: “Given the realities of this year’s election, I believe the Fed is the only game in town…So get to work, Mr. Chairman.” What audacity! Senator Schumer should take some of his own advice. He should go to work. The Federal Reserve has been the only game in town. For two years (2009-2010) the Democrats controlled both Houses of Congress, as well as the Presidency. They did nothing to help the economy. During the two years since, gridlock has dominated Washington. Again, nothing has been done to encourage economic growth. While doing nothing to stimulate economic activity, the Administration has increased entitlements and transfer payments. (In June, 80,000 Americans signed on to new jobs, but 85,000 Americans signed on for Social Security disability checks.) They have also maintained annual deficits in excess of a trillion dollars, while adding $5 trillion to our national debt.

What are needed are proactive, business friendly, results-oriented fiscal policies, of the type laid out by John Taylor in his new book, First Principles. He writes of the basic principles that historically have allowed growth – a predictable policy framework, rule of law, incentives that emanate from a reliance on markets, and a limited but purposeful role for government. Specifically, the tax code should be lowered, broadened and greatly simplified. Unfortunately, there are a number of Republicans and Democrats who do not want to see that happen. Accountants and lawyers thrive on the complexity of the code, as do large businesses and sophisticated traders who can take advantage of discrepancies in prices that develop. Tax rates, nevertheless, should be lowered across the board and most deductions eliminated. The benefits of tax deductions accrue primarily to the well-off, as pointed out by Paul Ryan in Friday’s Financial Times, which is why those like Warren Buffett and George Soros would rather have tax rates raised, but ‘don’t touch my deductions.’ Like “Brer Rabbit, they understand the attractiveness of the “Briar Patch.” Concomitantly, regulations should be simplified, so as to be easily understood, and, once implemented, they need to be enforced.

Granted, the economy’s growth over the two decades leading up to the credit crisis was driven, in part, by an increase in personal debt. Deleveraging is necessary and will, other things being equal, act as a brake on growth. It is the optimism of a Ronald Reagan that is missing from Mr. Obama’s discourse. This President views American history as a “series of collective accomplishments”, rather than the personal success of individual’s who took a chance on something in which they believed. “If you’ve got a business, you, you didn’t build that. Somebody else made that happen.” That statement by the President was revealing of his attitude toward free enterprise and individual achievement.

There have been times in the past when popular sentiment failed to anticipate growth yet to come. The historian, Frederick Jackson Turner (1861-1932), believed that the American economy was linked to the American frontier. He saw the end of the 19th century marking the end of western expansion and, therefore, saw that event as a retardant on future growth. He was wrong. While President Carter never used the word “malaise”, the term came to define his term in office. During the late 1970s winters, while wearing a sweater, he spoke to the American people of the necessity of keeping the thermostat turned down, instead of encouraging innovation and more drilling. Again, he was mistaken.

It is true that many inventions have originated inside government. War brings out the need to produce new weapons, medicines and other goods that allow an army to arm, feed and clothe itself. Atomic energy and concentrated frozen orange juice were both products of World War II. A decision by the government to counter the Soviet’s Sputnik in 1958 led to the creation of Defense Advanced Research Project Agency (DARPA) from which many modern inventions ensued, the best known of which (with apologies to Al Gore) was the internet.

But by far most of the comforts we take for granted, the items we use daily from the cars we drive, the food and drink we consume, to the tools we use in our respective trades and how we entertain ourselves are thanks to the creative genius of our fellow men and women and to those financiers who backed them. Economic growth can be ours again, but only if and when government steps aside.

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