NEW YORK (TheStreet) -- Blog after blog and column after column have bemoaned the slowness of the current U.S. economic recovery. The lead column on the front page of the April 21 TheWall Street Journal said that "after almost five years, the recovery is proving to be one of the most lackluster in modern times." No doubt about that.
The table below shows the compounded annual growth rate (CAGR) of Real GDP in the U.S. from the trough quarter of the past 4 recessions for the ensuing three- and five-year periods.
Courtesy of Federal Reserve Bank of St. Louis
As is notable, the CAGR has slowed in every sequential recovery since that of 1982.
Each blog or column offers a different but unique perspective as to the possible reasons for the sluggishness, with the latest being the neo-Marxist theories advanced by Thomas Piketty (Capital in the 21th Century), a French economist who, like the discredited Karl Marx, believes that free-market capitalism sows the seeds of its own destruction.
A Free Market?
Unfortunately, neither America nor Europe can be used as the petri dish for Piketty's theoretical experiments because neither really have free-market capitalism. Over the past 30 years, government encroachment on the private sector has stifled growth, and today's so-called "capitalist" system is much closer to definitions I see of "Statism" or even "Crony Capitalism."
I believe that the growth slowdown observed in the table has its roots in the unintended consequences of government intrusion into, and restrictions on, the private sector.
Banking: The Basel Regime
In the Basel regulatory regime under which the world's banking system now operates and which began in 1988, each bank asset is classified into a risk bucket which requires capital backing. Sovereign debt is classified into a bucket that requires zero capital, as if it were riskless, while private sector loans -- the drivers of economic growth -- have a 20% capital requirement plus an additional loan loss reserve contribution.
- While Americans may view U.S. Treasury Securities as riskless (because the government can print money to repay the debt), it is clear that the debt of governments that can't print money (i.e., those in the European Union such as Cyprus, Greece, Spain...) are not riskless. Yet, under Basel rules, a vast amount of such debt is carried at par or face value on European bank balance sheets. The world knows that the European banks are significantly undercapitalized, but the game continues.
- The bias imparted by this sort of capital regime makes loans to the private sector unattractive, especially in times of economic stress where loan losses are high and bank capital is under downward pressure of is already de minimis. But, loans to the private sector are what are needed to create investment, capital spending, jobs, and a growing economy.
The politicians say they want banks to make loans to businesses, yet, all of the rules, regulations and enforcement processes make such lending difficult. Just the cost of compliance strangles private sector lending at community banks in the U.S.
Artificial Interest Rates
Economists view interest rates as the "price" of money. Like in the 1970s, where price controls resulted in the exact opposite of their intended outcome, i.e., inflation rose, five years of artificially low interest rates (price controls), orchestrated by the Federal Reserve, has resulted in a drying up of private-sector funding instead of increased lending. Because rates of return in the U.S. were too low, the money went searching for higher returns in emerging markets (EM). It is well documented that the result was an EM bubble that burst last summer when former Fed Chairman Bed Bernanke uttered the "taper" word.
The banking system and Fed rate manipulation are but two macro examples. Over the past 30 years, governments at all levels have imposed rules, regulations, fees and taxes on the micro level that have stifled the growth of small businesses. Ask anyone running a business about government regulations and fees.
The Wells Fargo/Gallup Small Business Index, taken at the end of last year, asked small businesses what they foresaw as the most important challenge in 2014. 36% of the respondents listed "government," including Obamacare, regulations, taxes, and government in general, a record high.
Yet, all of the regulatory and policy obstacles still don't mean that the economy can't grow. It means that the economy can't grow as fast as it could if it were unconstrained. Earlier, I reference the political whine that banks aren't lending despite having 34 times the level of their required reserves. Well, despite the weather, in first-quarter 2014 the Fed's survey of large banks showed new loans of $91.6 billion, a huge increase sequentially from the $55.8 billion of the previous quarter, and eclipsing the previous new loan record for the large commercial banks of $80.1 billion set in the first quarter of 2000.
Still, the stifling regulatory burden held back small bank lending. For 1Q 2014, it was $5.2 billion, sequentially higher than the $3.3 billion of 4Q 2013, but nowhere near the $8.1 billion of 3Q 2007 or the record $14.8 billion of 3Q 1999.
Other signs of higher growth come from a tighter labor market, the beginnings of upward wage pressures and skill shortages, rising retail sales and sales of durable goods (e.g., autos), and the upward movements of nearly all of the leading indicators.
All of these signal a pickup of growth from the lackluster track record of the past five years. Unfortunately, we are now satisfied with a much slower rate of growth than an unfettered free-market economy would produce. What we now have is analogous to an economic engine constrained by a "governor."
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
Robert Barone (Ph.D., Economics, Georgetown University) is a Principal of Universal Value Advisors (UVA), Reno, NV, a Registered Investment Advisor. Before acting on information contained herein, the reader should consult his/her own investment advisor.