Small Matters: Government needs to step aside to improve economy

Although the economic recovery is now "officially" more than two years old (the National Bureau of Economic Research dates peaks and troughs in the economy long after they occur because it takes time to complete data collection on the entire economy), most seem to feel like we are still stuck in some sort of a recession. Others are certain we are on the verge of another one.

The University of Michigan's Consumer Sentiment Index recently reached the lowest level since 1980, previously a year thought to be part of the worst recession since the Depression. That is, until the most recent one.

Initial unemployment claims remained above 400,000 a week and job creation an anemic 100,000 or so a month. To restore employment levels enjoyed in 2007, the peak of the last expansion, the economy needs to produce at least 300,000 net new jobs every month for the next three years (125,000 for population growth and 200,000 to put the eight million already unemployed back to work).

Headline inflation is now running more than 5 percent, as even small businesses raise prices on their products and services. (In July, 24 percent of the 350,000 member firms of the National Federation of Independent Business reported raising average selling prices, compared with 18 percent who cut prices.) This comes after years of declining prices.

This is not a problem that government can solve. But government can prevent the private sector from solving it. History has shown the private sector can solve economic malaise, when it is less encumbered. Government has to get out of the way and stop trying to turn small businesses into agents of Washington's social policies - redistribute income and wealth, provide health care for everyone, provide day care, pay a "living wage," fund "pet projects," clean up streets, and comply with a myriad of new regulations from the Environmental Protection Agency, Occupational Safety and Health Administration, Federal Drug Agency, and others.

Then there is the plethora of regulations from state and local governments such as mandatory paid sick days. New York City has created a new bureaucracy to help aspiring restaurant owners to find their way through the city's mass of regulations.

"Government job creation" is an oxymoron. This is easily seen at the state level, where spending must be balanced with tax revenue. If the state government hires someone, they are removed from the private sector and their output is lost. Taxes levied to pay the government employees' salaries reduce private citizens' ability to spend dollar for dollar, a wash for total spending. The private sector benefits only if the government worker produces something that is more valued than the private production lost.

At the national level, the government can borrow as well as tax. But in a closed economy (no borrowing from foreign countries available), borrowing from citizens also reduces their ability to spend dollar for dollar, a wash, more or less. Only when the government borrows foreign savings and does not borrow entirely from its citizens can federal government spending provide some sort of short-term stimulus.

But then there are "more dollars chasing the goods," a situation that usually produces inflation - unless the rest of the world will take our "dollars" and give us real goods in return and be happy.

This is the unique position of the United States, and the result is not inflation. Rather, it is huge trade deficits. Our trading partners give us as much as $800 billion of goods in exchange for dollar bills, so we give them nothing that we made in exchange for the goods we get - just pieces of paper, if you will, that are claims on our output if they choose to exercise them (buy our goods or other assets).

The result of this is $14 trillion in federal debt, and we taxpayers pay interest on it every year (about $800 per capita in 2010). This burden rises as our debt rises, or as the interest rates we must pay rise.

It is the private sector that creates wealth and jobs, not government. Sometimes the government can be very helpful, by helping to organize the economy, enforce the rules we make, protect us from others who would take what we have if they could.

In the former Soviet Union, the government owned virtually everything and managed resource allocation. Politicians, not "Bill Gates-types" who produced valuable products and jobs, lived well at the expense of the citizens.

As the government's reach into the private sector increases, the opportunities for the private sector to grow and produce wealth and jobs are restricted. It is a history lesson we should learn.