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Crony Capitalism Needs a Kick in the Keister
Our slow growth might be a result of too little uncertainty, of the competitive variety.


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James Pethokoukis

What are America’s 21st-century economic challenges? Economic growth since 2000 has averaged just 1.8 percent annually, half the rate seen in the last half of the 1900s. The Great Recession was devastating, of course. But usually the deeper the downturn, the more robust the recovery. Not this time. The Congressional Budget Office estimates the nation’s real gross domestic product was still 7.5 percent below the pre-recession trendline at the end of the recession. By the end of 2013, less than one-half of that growth gap had been closed. Also, according to CBO, employment was about 6 million jobs short of where it would be if labor markets were back to “normal.”

And there’s more to blame than the tax hikes and heavy-handed regulation of Obamanomics — there is something worrisome going on that predates the current administration. McKinsey Global Research points to the increasingly lengthy “jobless recoveries” after recessions. From the end of World War II through the 1980s, labor markets snapped back quickly after each downturn. It took an average of only 6 months to return to pre-recession job levels. But normalization took 15 months after the 1990–91 recession and 39 months after the 2001 recession. The Great Recession ended in June 2009, so we are currently at 57 months and counting. And when jobs do return, the good-paying, middle-class ones always make up a smaller share of the job market than they did before.

The Democrats have an explanation. We may not know who their 2016 presidential nominee will be, but we can make a pretty good guess as to his or her message: too much inequality, too little public investment.

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And what will be the Republican counter? The temptation will be to obsess over numerous Obama policy mistakes and set forth a sound-bite-friendly plan: Repeal Obamanomics, restore the economy. An intellectual upgrade from that simplistic analysis might be some hand-waving about how “uncertainty” depresses the private sector’s venturesomeness. Yet as a new J. P. Morgan research note points out, uncertainty — measured by the Baker-Bloom-Davis Economic Policy Uncertainty Index — has been declining since 2011. Inconveniently for the GOP’s uncertainty theorists, business spending has moderated instead of accelerating.

Maybe there is something to uncertainty theory. But the problem might be that we have not too much uncertainty but much too little. Maybe the U.S. private sector has become too conservative and cautious. As the entrepreneurship researchers at the Kauffman Foundation recently warned, “A number of signs point to a secular [i.e., long-term] decline in U.S. business dynamism, which goes far beyond the more recent effects of the Great Recession.” They observe, for instance, that the number of young technology companies — the fast-growing “gazelles” that drive job creation — has fallen 30 percent since 2001. More broadly, according to the Wall Street Journal, new companies made up roughly half of all American businesses in 1982 versus just a third today.

These findings suggest big problems at the heart of America’s version of entrepreneurial capitalism. Start-ups generate the “disruptive innovation” that creates new goods, services, and jobs. And they force established businesses to try to match them. Without competition from new companies, old ones will pursue only the sort of “efficiency innovation” that makes production cheaper, often by replacing people with machines. The U.S. still generates lots of innovation overall, but maybe too much is of the job-killing sort rather than job-creating kind that marks a dynamic economy.

While free and frequent entry by start-ups is critical, so is exit by incumbents. Established players can’t be allowed to win through lobbying what they can’t achieve in the marketplace. Take the cronyist Dodd-Frank financial-reform law. Not only does it institutionalize the “too big to fail” safety net for megabanks, but it also disadvantages with burdensome regulation all the community banks that lend to small business. Other ways government sides with Big Business over entrepreneurs include overly stringent patent and copyright laws and a subsidy-ridden corporate tax code.

Mitt Romney once said, “Corporations are people.” And he was partially correct. Punishing corporations hurts workers and shareholders and customers. But corporations, unlike actual people, don’t deserve a safety net or government backstop. Upstart competitors must subject them to a “perennial gale of creative destruction.” May the most innovative company win. Capitalism without failure is corporatism. And that can only lead to stagnation and then decline. Pro-business Republicans like to give companies a pat on the back, when what business really needs is a competitive kick in the keister.

— James Pethokoukis, a columnist, blogs for the American Enterprise Institute.



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