Growth: Never More Needed, Never More Misunderstood

What should be clear to all Americans is that the need to grow the economy has never been more critical. But what constitutes real growth and the pathway to achieve it has never before been more confused.

The need for above trend growth in GDP was made even more pressing last week when the Treasury announced that the budget deficit for fiscal 2009 breached $1.1 trillion. The excess spending over revenue for June was $94.3 billion, the first deficit for that month since 1991 (fiscal 2010 will begin on October 1st). In addition, the national debt now stands at a record $11.6 trillion with trillion dollar annual deficit projections as far as the eye can see. While we continue to pile up a record amount of debt, the revenue outlook continues to decline, as the Administration's growth projections remain overly optimistic.

So it is absolutely critical -- unless our long term strategy is to hyper inflate or default on our debt -- that we dramatically expand the tax base. So I thought I should write a few brief words explaining what viable, long lasting growth really is and how it is best achieved.

Real growth comes from empowering the private sector. The best way to achieve this is to allow the private sector to control more of their own money. Cutting taxes and reducing public spending serves to shrink the size and scope of government while at the same time increasing the power of individuals. It should be obvious why it is most important for individuals to have control over the allocation of their resources. Only you (the private consumer) know best what needs to be produced and what needs to be consumed. That's because the individual risks his or her own capital, whereas the government risks other people's money. Since government spending originates from a central planning authority, it is not subject to the vetting process of those who have the most to profit or lose from that decision. The result is an inefficient distribution of resources and a misallocation of capital.

Likewise, only the private sector is best at creating job growth. Government created job growth exists by fiat and is not subject to the profit and loss analysis of the private sector. The jobs that are created by private sources (those who have the most skin in the game) have a predilection to be economically viable, sustainable by the free market and are accretive to economic growth. A government dictated source of employment is not subject to market forces. Therefore, the relevant question is not asked; can the job exist without government support or does it add to the creation of new capital?

True growth does not come from a stimulus package or from a doubling of the monetary base. Placing the economy further into debt or expanding the money supply beyond its capacity for growth only assures future tax increases and inflation.

That is why all this talk about how many jobs the government will create or save is nonsense. Job growth has been anemic for the past decade because it has been based on the servicing of asset bubbles. What we need is a stable currency and low inflation so that economic growth is balanced. It is also inane to speak about how the public sector must increase spending because the private sector is deleveraging. The private sector is deleveraging because market forces necessitate that debt levels contract.

The recent government actions are constructed to interfere with the cathartic reconciliation process of markets. And that is why talk of a viable and healthy recovery in the economy is not probable until our government assets to the belief that markets are the solution, not the source of our infirmity.

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Michael Pento is the Chief Economist for Delta Global Advisors and a contributor to greenfaucet.com

Comments

[shamanbart]

This article highlights the inherent fallacy of capitalism -- that perpetual growth is sustainable. Eventually, this unrestricted, unchecked growth -- of manufacturing, consumption, population, etc. -- will reach a point where we run out of resources, space or consumers with money. Maybe that's what this recession is all about -- the country's inability to provide enough jobs to provide enough consumers to make and consume enough goods at a rate of growth.

Left to private industry, what do we get? Incomprehensible financial wheeling and dealing, outsourced manufacturing and services, employment of illegal aliens, overleveraged banks, overleveraged consumers, unemployment, debt, and a healthcare system with 7 - 9 % yearly inflation and a yearly decrease in services covered by health insurance.

Private industry and corporations need a new modus operandi -- not one that holds the almighty dollar above all, but one that rewards sustainability, providing domestic jobs, responsible consumption and responsible disposal. Until government is able to put those rules in place, we will continue to see bubbles and subsequent recessions. God knows the private sector police or restrict themselves.

[itolduso]

I've had a close up look at the 'growth' fueled by the private sector, unconstrained by government oversight, regulations or safeguards.... they twisted and corrupted and 'rigged' the market... private individuals forming 'packs' - like feral dogs - spurring a cancerous growth in response to their fraudulant demand.....eating up resources and crowding out productive life, finally collapsing in a stupor amid the ruins they created offering only claims of "I Don't know what happened", and "I didn't do anything wrong". No thanks. Don't want to go through that again.

[marinara]

that sounds like privatization. I think Michael Pento is talking about small business.

[leduck]

Growth?
growth in what?
Population?, Consumption? Spending?
I disagree
What goes up, must come down. Ask the Romans or the Easter Islanders.

As for private enterprise making better descisions than govt., I think there have been plenty of bad decisions to go around. Like business who thought it'd be a good idea for the govt. to build more frwys to increase urba sprawl.

All of this is fine unless you know the world is a ball and know something about PEAK OIL.
Then you realize, oooops! don't listen to the oracles. They are wrong.

[blood1]

As much as everyone claims that it is private sector growth that is needed, it was private sector's investments that got us to where we are. The non-regulated financial services area of our economy are those who took the big risks and when they failed, it took down the rest of the economy.

So you are proposing that giving the private sector more influence is the way out of this, that somehow they learned their lesson about risk taking. Why do we continue to see mortgage lenders still targeting those who lost their homes with risky re-packaged loans that are no better than what we saw in the mortgage meltdown?

Do you really think that private sector investment (albeit you did not say if that was big business or not) is NOW going to be more responsible? Put money in the hands of private citizens without protection from the "loan sharks" or the ever increasing rates from credit card companies...and somehow that is going to be the answer.

Only if you are willing to let any business or sector fail and not go to the government for a bailout will I believe that you are honestly concerned about the welfare of private citizens, those of the lower and middle class who have the most to lose, otherwise your argument has no merit.