Private sector still resilient, but troubled outlook persists

Raymond Keating
Raymond Keating

American entrepreneurs, investors, businesses and workers are a hearty, resilient bunch. Despite government derailing the economy — and keeping it derailed for more than four years now — the private sector nonetheless continues to push ahead.

Assorted political supporters of and media apologists for big government activism assert that government has saved the private market from corruption and excess, not to mention unexplainable and unexpected shocks.

If not for government action, they assert, the entire economy would have gone off a cliff. This is the same spin served up for more than three-quarters of a century regarding the Great Depression, so why not replay the fiction now?

In reality, the economy of the 1930s plummeted off a cliff to great depths. Over the past four years, we fell into a deep recession followed by a grossly underperforming recovery. These were not cases of private market failure nor unforeseen shocks. Instead, these were unmistakable instances in which misguided government policies caused great harm.

During the Great Depression, protectionism, high taxes, large increases in government spending and unprecedented regulation wreaked havoc on private investment and business. In similar fashion in recent years, government subsidies, bailouts, so-called stimulus spending, regulatory activism, misguided monetary policy and higher taxes, along with the threat of further tax increases, have raised costs and created uncertainties that have done real and considerable economic damage.

Even considering the recent and potential effects of troubles in Europe, it must be recognized that Europe suffers from slow growth, debt woes and looming recession specifically because government sucks up more than half of GDP — along with commensurate and burdensome tax and regulatory structures.

Keeping all of this in mind as we look ahead, the key question remains: Will policymaking change to unleash the private sector in 2012? Given the political breakdown between the White House, Senate and House of Representatives, it’s hard to visualize any significant changes for the positive.

  • Federal spending: Some negatives could be avoided if, for example, spending is reined in during the current fiscal year. Unfortunately, federal outlays not only climbed to new heights in FY 2011 — after unprecedented growth during FY 2008 and FY 2009 and a small, one-year breather in FY 2010 — but are expected to increase once more in FY 2012.
  • Tax uncertainty: Will various temporary tax measures affecting entrepreneurs and businesses be extended for at least 2012? Unfortunately, tax uncertainty will continue to weigh on small business confidence and the general outlook in 2012.

In 2011, for example, Section 179 expensing allowed businesses to write off up to $500,000 in capital expenditures.

In addition, a 100 percent bonus depreciation applied to capital expenditures above $500,000 on new equipment, including for businesses spending in excess of $2 million. Unless changed, Section 179 expensing level is scheduled to fall back to $125,000 in 2012 and subsequently retreat to $25,000 for 2013, while bonus depreciation declines to 50 percent. For good measure, increases in personal income, capital gains and dividends tax rates are scheduled to take effect at the end of this year. At the very least, President Barack Obama has called for increased tax rates on upper incomes, meaning reduced incentives and resources for entrepreneurship, investment and job creation.

  • Regulatory activism: The Obama administration shows no inclination for reining in regulatory activism. Consider the president’s pro-regulation recess appointments to the National Labor Relations Board and Consumer Financial Protection Bureau. As a report from makes clear, these were appointments meant to score political points rather than decisions based on what makes sense for economic growth and job creation. Given these actions and campaign rhetoric, Obama seems intent on pushing a populist, liberal, class-warfare, anti-business agenda heading into the November election in an effort to energize his liberal base.

These and other uncertainties and potential cost increases will continue to dampen entrepreneurial and business activity. Considering this entire scenario, it’s difficult to envision the U.S. economy getting back to real annual gross domestic product growth of better than 4 percent, which is where growth should be during recovery and expansion years. While the economy should continue to expand in 2012 due to those resilient private-sector players, real growth likely will remain uneven and underperforming. Likewise, employment growth will continue to come up short compared to where it should be at this point in a recovery, with consumer confidence similarly restrained.

One factor that could change the outlook for 2012 is if business owners and investors see a pro-growth political majority emerging as November elections approach. Given that markets are forward-looking, growth could begin to pick up during 2012.