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August 22, 2014

What government shouldn’t be doing in order to improve the economy

In as much as politicians would like us to believe that the economy has turned around, those of us building a business, earning a paycheck, or just attempting to make ends meet know this is a dismal economy. President Calvin Coolidge once said, “The business of America is business.” Business has been the engine that created and made the United States the most productive and creative society in the history of mankind. So, why is this recession so bad and what do we do to fix it?

According to Stanford University Economics Professor John Taylor, this economic recession is the “worst ever.” Four years into this recession, here is where we are:

* Long term unemployment (this includes those no longer able to file for unemployment, the under-employed, and recent graduates still looking for work) is 15.1 percent nationally (June 2012) according to bureau of labor statistics; Minnesota is 12.1 percent through this 2nd quarter. This is far beyond the politically correct and incomplete 8.2% reported for federal and 5.6 percent for Minnesota for June 2012 (U3= includes those able to file). We know how bad it is even if the reporting is not forthright.

* The Dow Jones is still trying to get back to its 2007, pre-crash high of over 14,000. Nasdaq is at about 60 percent of its 2000 high. The market doesn’t believe we’ve turned the corner.

* As of this writing, every major sector of the stock market has reported lower revenue growth for the 2nd quarter (Bloomberg quote). Customers aren’t buying.

* 30 year fixed rate mortgages are at over 20 year lows and still the housing market and building industry remain depressed. Home buyers just aren’t buying despite the incentives of low cost of money and low prices.

* Small business lending peaked at 2008 and struggles to get back to those levels. Whether new regulations impede borrowing or the fear of an unknown future, business owners are cautious about borrowing and investing.

* The U.S. economy’s growth rate is only 1.5 percent. Many economists believe twice that to be a healthy rate. People aren’t spending if they don’t have to.

* Manufacturing rates are down or flat in major markets – they don’t see demand.

Government efforts over the last 4 years have not helped. But since it’s hard to prove what would have happened if action had not been taken, I won’t argue here whether TARP and Stimulus made matters worse or better. Although, Professor Taylor and other economists strongly believe that these actions made the economy worse.

This brings me to the point of this piece.

In my humble opinion, it is time to discuss not what government should do … but what government should not do.

Americans are good hearted people. We give more to charity than any of the 153 countries surveyed last year – between $212B and nearly $300B depending on the measurement method. Americans also volunteer and help strangers more than any other country. Midwesterners and Minnesotans even more so.

Since the new deal, we have increasingly looked to government to do more and more of the things we used to do as individuals, through our churches, through volunteer organizations, and through our communities.

As a result of looking to government to do what we did, government is much larger, bureaucracies once created never die – and they need to be fed with our tax dollars. While one could argue that big isn’t necessarily bad:

* Government is by it’s nature very inefficient – after all, they spend other people’s money, which always spends more easily than one’s own;

* Government bureaucrats are easily disconnected from those they serve;

* Measures of their success tends to be based upon how many more people they help (rather than how many people get off the government dole).

U.S. business taxes are unreasonably high. According to CNN Money (hardly a conservative organization) when Japan lowered its tax rate earlier this year, we became the nation with the highest combined federal and state tax rate in the world at 39.2 percent.

In a world of limited resources there may be much we’d like to do, but only so much we can afford.

Because government has taken on so much, we have become dependent upon it far beyond its ability to provide, beyond what those contributing taxes can afford. So much so that we risk killing the golden goose and this is why:

We live in a world where capital, people, and information move freely. Businesses have bought into the concept of sunk cost … said another way, a bad investment doesn’t justify putting more good money after bad – to compound metaphors.

So as costs and regulations become less favorable in one market, a smart business makes incremental investments and hires in a less expensive one. Actions our government has/is chasing away what made us great.

Now is the time for frank discussion.

We need our representatives in Washington D.C. as well St. Paul, MN to apply discipline to law making and spending. They need to preserve and protect our way of life and encourage businesses to stay in the U.S. (or Minnesota), eliminate wasteful and value-destroying regulations and, like businesses and families, cut out luxuries to balance their budgets, reduce debt and live within our means.

Here are a few guidelines as they consider this important work:

* Good parents create independent offspring capable of taking care of themselves. Government should not foster the reverse or protect us from our own stupidity. Tough love makes for good citizens.

* Everyone needs to pay some taxes. People don’t value what they get for free.

* Reverse those government actions which disincentive individuals and organizations from helping one another.

* Government shouldn’t pick winners and losers, subsidize anyone for activities with no demand, or protect us from our own dumb decisions or not buying our own insurance (rebuilding in a floodzone for example).

* In a tough economy we can not afford luxuries – its time to economize

* Debt saddles our children and restricts our future – government can’t do what it should if a large percentage of taxes go just to interest and principle payments. Fix this now.

* Citizens can’t expect to only work to 50 or 55 and have enough money to live into their 90s – encourage saving, discourage labor contracts which pass the retirement buck to the next guy to pay.

* Representatives need to be unafraid to say “this is not what government is for” no matter how much we’d like to be able to do something.

There is much work to do to protect our economy, remove what’s been done to make it ill, nurse it back to health, and ultimately protect our way of life.

John J. Alexander is President of Business Development Advisors, Founder and Chair of the Twin Cities Angels, and business author of the Angel Investment Tax Credit. Email him at: John@BusDevAdvisors.com