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The Inexcusable Q1 Collapse In GDP Growth Can Be Fixed

June 26, 2014

By Mark P. Mills

It's appalling. The recently-released Bureau of Economic Analysis data showed the U.S. GDP contracted by nearly 3% in the first quarter this year. This should be a four-alarm fire for policymakers to implement policies to re-ignite growth.

Blaming the Q1 GDP collapse on cold weather doesn't cut it. At best you might blame weather for a slight slowdown, not a collapse. And the dismal Q1 news is not an aberration: the GDP has averaged barely 1%/yr since the official end of the Great Recession. It needs to average triple that level. The only bright spot in all the data comes from the oil & gas sector; but more on that in a minute.

There is no mystery as to what will restore growth. The nation needs more, a lot more, new businesses.

New, small businesses are where jobs come from, and then tax receipts follow to fund government programs.

But the rate of creation of small businesses today is 30% lower than the booming 1980s. (For more on this, see the excellent Wall Street Journal OpEd by Nobel Laureate Edward Prescott and professor Lee Ohanian.)

It is tautological: every business began as a start-up and was small before becoming big, from Microsoft MSFT -0.64% [NASDAQ: MSFT], Intel INTC -0.11% [NASDAQ: INTC], Apple AAPL +0.77% [ NASDAQ: AAPL] and Google GOOGL -0.02% [NASDAQ: GOOG] in recent history, to U.S. Steel [NYSE: X] or Ford [NYSE: F] back in the day.

Both the government's own data and the Federal Reserve Board, and economists of all kinds, have long known that small businesses create the majority of net new jobs. And small businesses exhibit not only greater flexibility but also generate more innovation, some 16 times more patents per employee than big firms.

How did we end up getting fewer small businesses? We taxed and regulated them away.

Regulations have been rising at a torrid pace. This Administration has thus far added 17,522 pages to the Code of Federal Regulations (CFR), with many more yet to come from a tsunami of rules to emerge from the Dodd-Frank financial overhauls and the Affordable Care Act. It's a bipartisan tragedy by the way. While this Administration is on track to blow by earlier regulatory onslaughts, the Bush Administration did add 19,000 pages to the CFR over its eight years. Survey small business owners and you confirm the obvious: ballooning regulations are arcane, opaque and growth-killing. (Check out the analysis and book on entrepreneurs by Gerduldig and Dearie of the Financial Services Forum.)

We also know that the U.S. used to have the lowest, but now has the highest corporate tax rate in the industrial world. Those that claim big companies like GE don't pay the high tax rate miss the point. Besides the fact that the big companies are not, on average, net job creators, the small companies don't have the scale, money or structure to ‘engineer' the lower or zero taxes. So the punitive high rates are being paid by small businesses.

As any high school economics student knows, if you want less of something, tax it.

Finally –imagine how much worse the economic data would be now if it were not for the thousands of small and mid-sized oil & gas businesses in America that have, on private and state lands, deployed new technology and capital to produce the one bright spot in the economy. The oil & gas boom has created over a million net new jobs since the Recession, and is adding at least $300 billion a year to the economy. (For more on this, see my Manhattan Institute paper Where the Jobs Are: Small Businesses Unleash Energy Employment Boom.)

It's time to reverse course and stimulate growth through fewer regulations and lower business taxes in every sector.

Original Source:



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