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Commentary: China’s economy flourishes as it becomes more free, while US takes a different path

POSTED: February 17, 2012 4:14 p.m.

John Scott

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A free economy is an engine for higher living standards - better health, transportation, housing, food, and the like.

Last semester a Chinese student said he was taught that China grows strongly because their government found the best balance between freedom and non-freedom. I disagreed. The only clear conclusion from the evidence is that China grows because they're more free every year. The U.S. has been on the opposite path.

Our remaining economic freedoms power an underperforming U.S. engine. We have growth, but weaker than otherwise. Recent news hints at some future growth, but my prognosis is bleak.

The largest looming threat is inflation - a threat embodied in the amount of money that banks have the ability to loan, but have not loaned. Before September 2008, these excess money reserves had been greater than $5 billion only one time - September 2001. Now $1.583 billion is unused in the banking system, over 300 times that $5 billion.

With strong economic growth this money will slosh into the economy, adding to our money supply of $2.106 billion, creating the largest inflation since the Civil War. Also note that our money supply - the $2.106 billion - is a result of a 54 percent increase by the Federal Reserve over the past three years. We have produced mounds of dollars and have the potential to produce even more.

If I grew more optimistic about recovery, I would grow more pessimistic about inflation. However, I am not optimistic about recovery.

In the depths of the 1980s recession, the average unemployed person was unemployed for 20 months, which was the highest since The Great Depression. Today the average is 40 months.

Though the unemployment situation is bleak, people who draw straight lines from one month to the next are encouraged by the last three months' reports, which brought the unemployment rate down from 8.9 percent to 8.3 percent. However, a quick look at the numbers in the calculation shows that about half of the decline in unemployment occurred because workers stopped looking for jobs. After all, if everyone who does not have a job suddenly stops looking for a job, the unemployment rate would be zero.

Taking account of the significant shrinkage of the labor force, the weak news of the past months is an improvement, because some people were hired. The patient is better, but is not in good shape.

Unemployment is high because the U.S. has low economic growth - 1.8 percent last year, though the long-run average is 3.3 percent.

Why are we stuck in a weak, faltering recovery, rather than growing strongly out of recession as we often do? This recovery is different because business spending on plant and equipment has not rebounded. Government spending is a larger share of the economy, and would be, even without the economic contraction. Meanwhile, business is a smaller part of the economy.

We who believe in free markets are not surprised, because we believe that business persons, who have their livelihoods at risk, are more likely to create value and avoid waste than government employees, whose paychecks do not depend on performance.

Business is reluctant to expand their operations or create new products because they cannot forecast their potential profits and losses.

What will business taxes be next year?

What will health care costs be in two years?

What does the guarantee on a corporate bond mean after government changed the bond contracts in the Chrysler bailout?

Will regulation kill the technological innovation that gave us a burgeoning natural gas industry for the past few years?

Will it be possible to build a pipeline in the United States in this century? (We already know that it is impossible to build an oil refinery in this country.)

It's easy to sit back and let the market work, to let people try to better themselves and, in the process, create jobs for themselves and others. It's easy to let them find new ways of producing, using resources from around the world. We did this 100 years ago, and China is doing it today.

It's harder to leash these creative energies. To worry so much about the possibility that someone might unfairly lose a job that we make anti-employer labor laws guaranteeing that no one will be hired; France and Spain are showing us the way. To worry so much about a government worker losing a job that we only expand, but never contract, the federal workforce; Greece is showing us the way. To worry so much about a business gaining market power that we shackle all business; Belgium is showing us the way.

Our economy will grow if we allow it to grow. And our economy will have monetary stability if we stop trying to compensate for real growth with virtual dollars.

John Scott is an associate professor of finance and economics in the Mike Cottrell School of Business at North Georgia College & State University.


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