WASHINGTON – President Obama confidently declared to the Nation in his last State of the Union Address that the American economy is back. Under his administration the Great Recession of 2008 was contained, and then 14 million new jobs were created. The economy is growing at a healthy pace.
Not that good
Well, it is not that good. What we have had since 2009 is the worst economic recovery in modern American history. The average rate of growth used to be 3%; now it is 2%. A huge deterioration. And this decline occurred notwithstanding an unprecedented period of high federal spending (hence the debt explosion) and zero interest rates that were supposed to guarantee higher growth. Unemployment is down to 5%. But this is largely because far fewer people are active workers. Millions have dropped out. Labor participation is extremely low.
Add to this millions of people who have part-time jobs only because they cannot find full-time occupation and the picture turns dark. Most of the new jobs created by this economy are in low paying sectors: waiters, janitors, nursing assistants, store clerks.
What we have is a highly indebted, slow-growing American economy that at its best is able to create low paying services jobs. And the trouble is that the President and many others claim that this is good. We are doing fine. No, we are not. With this feeble growth, and this unprecedented level of debt we are well on our way to a slow but inevitable economic decline.
The “Land of Opportunity”
America used to be the “Land of Opportunity”. By this I mean the country in which many wanted to be entrepreneurs because they knew they had a fair chance to succeed. The broader context –laws, regulations, contracts enforcement, patent protection, credit availability, taxation– was generally pro-business.
And then there was a huge continental size market populated by eager consumers. When Americans see something new, or better, or cheaper they will buy it. For all these reasons, many Americans who started new enterprises did well, while some did extraordinarily well.
In that era the “Self-Made Man” became the quintessential American icon. At the same time a symbol of success, and a role model for others aspiring to be business owners.
Old model not working anymore
Well, this old model is not working anymore. Sure, whatever may be happening to the US Stock Market in recent days, the American economy is still growing; certainly more than anemic Europe, or semi-moribund Japan. Employment is growing. The US Dollar is strong. But, compared to its historic average, America has been experiencing very slow growth, while the income of lower middle class and working class Americans has been stagnating for decades.
Low rate of investment
So, what is the problem? The problem is in a bad combination of higher taxes, suffocating regulations and Fed-induced perverse incentives that push large companies to issue more debt, instead of investing to expand operations.
The net result, as David Stockman points out in his Contra Corner, is that net investment in 2014 was only 2.3% of GDP. This is barely half the 4-5% average that prevailed in the high growth era of the 1950s and 1960s. And right now, Stockman notes, net investment is still below the 2007 levels.
Fewer new businesses created
And this disappointing investment data is confirmed by the declining number of new businesses being formed. The declining number of new enterprises is the red flag, the proverbial canary in the economic mine, indicating that a negative trend is now dominant.
Simply stated, new businesses, the proverbial startups, are the heart and soul of the American economy. Hard to think about future growth and dynamism if their numbers go down. But this is exactly what is happening.
As Daniel Henninger points out in a WSJ piece, the number of one year old businesses grew nicely from 550,000 in 1987 to 650,000 in 2006. But then they started going down.
Of course we have to factor the Great Recession of 2008 and 2009. Many companies, large and small folded. But the recession, however severe, ended. Since 2009 we have had many years of uninterrupted growth. Still, the number of new startups keeps declining. In his WSJ piece Henninger quotes data from the Kauffman Foundation. In 2012 there were only 400,000 new companies created in America.
And it gets worse. A 2014 Brookings Institution report, also quoted by Henninger, indicates that since 2008 every year there are more companies going out of business than new businesses created. This is a horrible trend.
Now, we can debate the causes of all this. I cited bad monetary policies, high taxes, and a positively anti-business regulatory environment. Other talk about the crisis of innovation, (not enough of it to give life to new technologies and new companies that will produce them), “secular stagnation”, or whatever.
The pro-growth eco-system is gone
The fact is that, due to multiple factors, the legendary pro-growth American economic “eco-system” is no longer there. The old, easy to understand incentives to start a business and grow it are no longer there. In some sectors the regulatory thicket is almost impenetrable. As a result of all these new obstacles, fewer young people have the interest and the aspiration to become entrepreneurs.
This is a major problem. Whatever may happen in Wall Street in the next few weeks, this entrepreneurship decline is a real, structural impediment to robust future growth. America has become a country in which debt-driven, slow growth is the new model.
Debt driven economy
Of course, until now financing operations through extremely low interest corporate bonds seemed extremely smart. Many companies got essentially free money. Yes, but it looks that this free money was used to fund current operations or stock repurchases. It has not been used to fuel new investments.
The fact that President Obama ignored all this in his State of the Union Address is a bad indication. Of course, he is defending his 7 years economic policy record.
But in so doing he is also telling America that this new era of slow growth, dangerously high levels of debt, under employment, declining entrepreneurship and lack of innovation is actually alright.
And, no, it is not alright. This is a road to economic and societal decline.
A new mandate
Let’s hope that a new President will have the mandate to shake up the system. We need aggressive deregulation, lower corporate taxes, and a genuine pro-business policy environment.
We need risk takers who once again feel that it makes sense to start a business in America, without having to worry all the time about inspections and compliance with obscure rules that most people do not even understand.