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Tuesday
Feb052013

Blame Capitalism When Government Spending Fails

Contributed by Chriss Street. Specialist in corporate reorganizations and turnarounds, former Chairman of two NYSE listed companies. His latest book, The Third Way, describes how to achieve management excellence and financial reward by moving organizations from Conflict and Confrontation to Leadership and Cooperation. He lives in Newport Beach, CA.

The Left’s premier economists, such as Paul Krugman, John Cochrane, Robert Stiglitz and Gary Becker blamed the “Great Recession” on the failures of capitalism and championed massive “government investment” as the right medicine to revive U.S. growth. But after $6.2 trillion of deficit-spending and the economy suffering the worst recovery in US history, these academic geniuses are desperate to shift the narrative by arguing growth has permanently slowed following the expiration of capitalism’s latest industrial revolution. Trying to blame capitalism borders on intellectual malpractice, I always applaud the Left when they admit deficit-spending doesn’t work.

The Bureau of Economic Analysis reported quarterly U.S. economic growth fell from +3.1% annually in September to a -0.1% in December. The contraction was driven by a reversal of the prior quarter’s spike in government spending, where accelerated spending temporarily hyped the economy just before the November elections. The month of January was especially ugly as the Bureau of Labor Statistics business survey documented 2.8 million jobs lost and unemployment rate rose to a “seasonally-adjusted rate” of 7.9%. The actual rate hit 13.6%, while un-employment and under employment hit 18.9%, affecting nearly 31 million Americans. Despite deficit-spending expected to exceed $1 trillion this year, massive “government investment” failed again to create any economic growth.

Rather than admit incompetence, the Left has trotted out a new narrative by Robert Gordon: Is U.S. Economic Growth Over?. The theory argues the world’s growth has been concentrated in 3 industrial revolutions since 1750. Gordon argues that the most recent industrial revolution based on computers peaked in 2000, and then went into terminal decline after 2007. This conveniently morphs $6.2 trillion in deficit-spending that failed to create growth into a government safety-net to cushion a capitalist economic decline.

Gordon contends the rapid economic growth led by the U.K. and the U.S. from 1750 to 2007, is a unique episode in human history. The paper seeks to demonstrate that economic growth was virtually non-existent in mid-evil times. Then growth “gradually accelerated after 1750, reached a peak in the middle of the 20th century, and has been slowing down since”. He identifies three distinct period of growth:

  1. Industrial Revolution #1 from 1750 to 1907 was driven by the steam engine and cotton gin. It took 150 years for the full impact of these productivity enhancing innovations to spin-off the railroads and steamships that interconnected the United States and fostered the growth of American manufacturing exports.
  2. Industrial Revolution #2 from 1870 to 1950 was driven by the electricity, internal combustion engine, and petroleum. The productivity enhancing innovations during this period drove America’s urbanization, transportation speed and freedom for women.
  3. Industrial Revolution #3 from 1996 through 2004 was driven by the advent of personal computers, the World Wide Web and mobile phones. After the productivity enhancements from these innovations had been fully realized with the spin-off global social networking, economic growth declined.

Gordon’s conclusion that the last short length of the industrial revolution that went into decline after 2007 may signal that the U.S. faces decades of slow growth similar to the 1972-96 period after the second industrial revolution; provides a welcome get-out-of-jail narrative for the Left. Therefore if capitalism is facing decades of slow growth, only government investments can halt the expected economic contraction.

American Founding Father, John Adams, 243 years ago said: “Facts are stubborn things.” Robert Gordon in 2000 published: Interpreting The “One Big Wave” In U.S. Long-Term Productivity in the prestigious National Bureau of Economic Research to explain the cause of the long wave of American productivity from 1891 and 1972. He determined protracted productivity was due to “closing of American labor markets to immigration between the 1920s and 1960s, thus boosting wages and stimulating capital-labor substitution.” Gordon also determined lower productivity from 1972 to 1995 was due to the entrance of unskilled adult females, legal and illegal immigrants, and teens holding down American productivity and wages.

The Left is desperate to shift blame onto capitalism after deficit-spending ballooned the debt of the United States from 80% to over 100% of the size of the economy, without generating sustainable economic growth. But it would seem politically incorrect for the Left to follow the implications of Robert Gordon’s research that the best way to increase productivity would be to throw women, illegal immigrants and teens out of the workforce. Contributed by Chriss Street.

CHRISS STREET & PAUL PRESTON present
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