Washington retarding our economic recovery

Retarding Recovery

One would have to go back to the 1930s or perhaps the 1970s to find an Administration as hostile to economic innovation and growth as this one is. Franklin Roosevelt clearly thought that the age of great industrial advancement was over and that it was Washington's task to increasingly regulate business while bashing the "selfishness" of "economic royalists" who were running American enterprises. After all, they had caused the Great Depression, hadn't they? The 1970s, especially during Jimmy Carter's presidency, were also antagonistic to commercial risk-taking. Inflation ran rampant, and the capital gains tax was raised to a maximum of almost 50%.

Washington is in a similar mood today (see Current Events, p. 17). One expression of this obtuseness-cum- animosity is a proposal from the Treasury Department to crush venture capital firms with burdensome new regulations as part of the Obama Administration's grand scheme to reform our higgledy-piggledy financial regulatory system.

Even though most venture capital outfits are relatively small and rarely, if ever, use debt, the Treasury wants to apply a bewildering array of rules similar to those for investment advisors and banks. Thus, instead of focusing on funding the next potential Apple ( AAPL - news - people ), Microsoft ( MSFT - news - people ) or Oracle, VCs will have to devote considerable time and resources to filling out disclosure and compliance forms. Treasury Chief Timothy Geithner's lame excuse is that since reform should cover the entire financial industry, leaving out venture capitalists would be a form of discrimination. Alas, there's more at work here than pigheaded logic.

This Administration truly believes that the private sector is a destructive, unguided missile that needs the constant and close supervision of Washington politicians. Without it we'd be subject to more disasters like the current financial crisis. In other words, Washington doesn't like the idea of venture capitalism because VCs and the entrepreneurs they fund create and do things without anyone's permission. Before anybody can invest in anything, Washington, in effect, would like investors to have to go through the equivalent of an environmental impact statement: Entrepreneurs, executives and investors cannot be left to their own devices.

Thus, the capital gains tax will be increased next year by at least one-third, and the personal tax on dividends will probably be doubled. The Administration will do nothing to mitigate the toxicity of the Sarbanes-Oxley Act, which was created in haste in 2002 to prevent corporate fraud and excesses. One harmful side effect of Sarbox is that it disproportionately hurts small businesses by burdening them with relatively huge accounting compliance costs and is therefore a barrier to smallish companies going public.

The Obama Administration's weak-dollar policy, inherited from the Bush Administration, also inhibits productive, robust risk-taking. It's no coincidence that when Ronald Reagan and Paul Volcker ended the Great Inflation of 1968--82 venture capital exploded, and Silicon Valley took off like a rocket. The U.S., and then the global economy, began an extraordinary quarter- century of expansion and breathtaking innovation.

But the Obama-ites think the prosperity of 1982--2007 is suspect and that they must keep business entrepreneurial impulses firmly in check. Thus the howls from VCs and entrepreneurs are music to Washington's ears. Filling out forms will sidetrack venture capitalists. Even if they pick a winner, they'll have difficulty launching an IPO to cash out and redeploy their capital. Successful risk-taking will be punished with higher investment taxes.

Not a pretty picture, is it?

Resurrect the Raptor

The Obama Administration has successfully killed the fabulous F-22 Raptor fighter aircraft. What a blunder. At a time when Washington has been spending on a scale unparalleled in American history, shooting down this program is supposed to demonstrate the Administration's ultimate deep-down fiscal rectitude--we're spending only to fight the recession--and its determination to bring sanity to defense spending. Instead of the F-22 the military will now have to make do with the F-35, a jet that has yet to go into production. The alleged virtue of the F-35 is that it's an all-purpose plane--there will be versions for the Air Force, the Navy and the Marines, as well as a couple of variations for export. The F-35 shouldn't cost as much as the F-22, and it's more versatile. What's not to like?

The problem is--assuming the F-35 sees the light of day in a timely manner--that this aircraft simply doesn't do the job in air-to-air combat that the F-22 does, nor does it have the F22's ability to penetrate sophisticated defenses. The F-22 is stealthier and faster and has greater range and considerably more firepower than the F-35. No potential enemy will be able to match the F-22.

Moreover, the F-22 is already in production. We will have manufactured 187 before the assembly lines shut down. The original plan was to build 750 of these planes. Killing the F-22 is false economy. While we face no Soviet-style threat today, who's to say what enemy may emerge a decade or so from now? The F-35 can be used for other functions, such as close air support for ground troops. In short, we should produce both types of aircraft. After all, the F-35 won't be in full production for at least another seven years. Doesn't prudence dictate that we continue with what we already have, thereby achieving at least something resembling economies of scale?

And isn't it telling that Japan, Israel and other allies strongly prefer the F-22 to the F-35? Critics say that the F-22 fighter has vastly exceeded its cost estimates. Well, so has the F-35. The profound problems the Air Force--and indeed the entire military--has with weapons development and procurement is a separate issue. The need to reform our procurement systems shouldn't stand in the way of developing the weapons we need now and will need in the future.

Administration officials and others take our superiority in the air for granted and thereby conclude we don't need to make big investments on future weapons systems to maintain that superiority. This is a classic mistake. There's a reason that U.S. ground forces haven't suffered a battlefield casualty from hostile aircraft since 1952, during the Korean War. Even in that conflict North Korean and Chinese aircraft were rarely able to attack our ground forces. We should take no chances with this superiority.

And going ahead with the F-22 shouldn't in any way block development and funding of unmanned vehicles, which are becoming more sophisticated and deadly. The world in which we live requires that we have strong military capabilities in all areas--conventional and unconventional.

Real Deal on FDR

New Deal or Raw Deal?: How FDR's Economic Legacy Has Damaged America--by Burton W. Folsom Jr. (Threshold Editions, $27). Following Barack Obama's election victory, Time magazine and others compared Obama with Franklin Roosevelt. The comparison was meant to be highly complimentary; however, it should serve as a serious cautionary note. Contrary to popular myth, FDR's economic policies were a disaster. They prolonged the Depression and made the U.S. an economic laggard compared with other nations during the dreadful 1930s.

Burton Folsom's book hammers home how counterproductive most of Roosevelt's policies were. The League of Nations conducted surveys during this era, comparing the economies of 16 developed countries. Folsom makes searing use of this and other data. In 1929 the U.S. unemployment rate was the lowest in the world. Of the nations surveyed, we ranked number one. Even in 1932--at the pit of the Great Depression, when unemployment in the U.S. reached 25%--we ranked 8 out of those 16 nations. But by 1938, after almost two terms of Roosevelt's destructive programs, unemployment was near 20% and we ranked 13.

Folsom amply documents how FDR's major economic initiatives, such as the National Recovery Administration and the Agricultural Adjustment Act, severely retarded recovery. He convincingly indicts FDR for morally corrupting the office of the President. He shamelessly egged on the Justice Department to prosecute his political opponents. Take Andrew Mellon: To Roosevelt and like-minded others, Mellon symbolized the old regime. Prosecutors told their superiors the case against Mellon was flimsy. Nonetheless, FDR demanded they go ahead and try to destroy Mellon.

The IRS was habitually used for the same purposes. Roosevelt flagrantly used federal recovery programs, which employed millions of people in work relief projects, for blatant partisan purposes. The programs became massive patronage machines. At least in 1939 a disgusted Congress rebelled and enacted legislation barring federal workers from such political activity.

Why is Roosevelt still highly regarded by so many historians? We've been discussing his domestic record, not his war leadership. (To give FDR his due, he foresaw the danger of Nazism and recognized the need to take action against it before most of his countrymen.) The truth is that historians are bewildered by economics; it's an alien subject, even when they study and write about it. Thankfully, Folsom's book and such others as Amity Shlaes' The Forgotten Man and Jim Powell's FDR's Folly: How Roosevelt and His New Deal Prolonged the Great Depression are convincingly setting the record straight.

President Obama should take note: Roosevelt-like stimulus packages and government intervention in the economy are counterproductive. Magician-like, Franklin Roosevelt could win elections despite his miserable economic performance, something Folsom examines in depth. But Roosevelt was one of a kind. If the current economic recovery is sluggish, President Obama and the Democrats will be hit hard at the ballot box.

http://www.forbes.com/2009/08/19/fact-a ... orbes.html