A Return to Optimism

Could Punitive Government Regulations in this Economic Crisis Aggravate America's Ability To Create New Jobs?

Everyone is in shock. After many years of uninterrupted business growth, we are experiencing a deep economic recession.

Senior executives, smart as they are, are panicked. With minimum or no experience in managing an economic crisis, many are prone to hasty hatchet work with respect to reducing expenses.

The teachings of yesterday's business performance masters have been forgotten in this economic crisis—or maybe never really understood or learned to begin with.

However, business performance historians, detached from the madness and uncertainty of the moment, remain modestly calm about the current economic collapse—and with good reason. Historical economic trends show that every 50 or 60 years, there's been a decade in which business people, politicians and economists in the world economy's developed countries expected speculative growth to go forever at an exponential rate.

More than 30 years ago Peter Drucker, in an Op-Ed page in The Wall Street Journal, said: "Between 1710 and 1720, around 1770, after 1830, around 1870, around 1910 (aborted in Europe by World War I but continuing in the United States until 1929) and finally the 1960s...Every such era believed that there would be no limit to growth, and every one ended in debacle and left behind a massive hangover..."

The historians know that financial panics, credit crises and ominous economic indicators are frequent occurrences in the big scheme of things. It has all happened before. And it's quite certain, after this economic crisis passes, it will be replaced with a new phase of economic development.

After every go-go decade prophesies of the end of capitalism, zero economic growth and a new world order become popular. But the historical reality is vigorous economic growth always resumed after the go-go years had come to an end.

The Expected and Unexpected New Engines For Economic Growth

The aftermath of a speculative era, Drucker reminded us, always brings substantial structural economic changes.

Consumer spending fueled our economic growth the past 20 years. That's over. Consumers can no longer rely on using their credit cards as a second source of income to purchase goods and services.

Equally important, declining home values reduce home-equity. And, in turn, the ability to borrow against that home-equity to purchase high ticket items such as flat screen televisions, expensive home remodeling, automobiles and the like has come to a grinding halt.

By now, everyone has heard about President Obama's ambitious plans for tackling our economic crisis by making massive capital investments in our infrastructure, energy, environment, health care and more. New job growth is expected to result from these investments.

Further, a great deal of attention is being given to stimulating job growth through changes in government policies. The purpose of these changes is to enable businesses to drive job creation.

Whether and when many of the economic changes will occur is still largely a matter of speculation. But they include drastically reducing corporate taxes for a fixed period of time, if small and midsize businesses in selected industries invest saved taxes into job-creating activities.

If this can be done in a manner that prevents abuses (inflated salaries and other misdirected allocations) tremendous sources of capital will become available to create new businesses within existing businesses.

This could usher in a new age of internal entrepreneurship and help jump-start the economy. Realistically speaking, businesses are far better at creating wealth-producing jobs than government.

With the proper incentives, American companies can create entirely new businesses, entirely new markets, entirely new products. The establishment of separate centers of initiative for creating innovation can create a massive number of new jobs and, thus, effective demand for goods and services.

Many think, of course, this is political poison. But it's a realistic potential solution, among others, to create what Keynesian economists call, "effective demand in a downward spiraling economy."

What's Right Is Not Necessarily Popular...And What's Popular Is Not Necessarily Right

Years ago Drucker commented that laws that result from a "scandal" are invariably bad laws. According to Drucker, these laws "punish 99 innocents to foil one miscreant. They penalize good practice, yet rarely prevent malpractice. They express emotion rather than reason."

Without doubt, we've witnessed unbridled greed in the financial-services industry and elsewhere. This greed is leading to regulation, to punitive laws and to outside interference. In the end, the damaging impact may really be on 99.9 percent of the American population because it will prevent doing what really works.

Whenever there is a scandal and a public outcry, punitive regulation has resulted, which, only too often, has aggravated the problem. Hopefully, the powers that be will be aware of this natural tendency and do what's right rather than what's popular.