“There are always going to be some bumps on the road to recovery.”

President Obama speaking at a Chrysler plant Friday after the May jobs report

Surely the most disheartening part of that quote is the word “recovery”. Five years after the housing bubble started to deflate and nearly three years after the financial crisis, we are still talking about “recovery”. Recovery implies recuperation from a shock or illness or regaining something lost or stolen. After nearly three years of trying to recover that which was lost (or stolen depending on your opinion of the banking system) shouldn’t it be obvious by now that a return to the way things were before the crisis isn’t possible or more importantly, desirable?

President Obama was touring the Chrysler plant to tout the “success” of the auto industry bailout started by his predecessor and completed by his administration. Tim Geithner took to the pages of the Washington Post earlier in the week to do the same. But what kind of success is it when the bailed out companies pay back loans with more money borrowed from taxpayers? Fiat is buying the Treasury stake in Chrysler for $500 million which leaves taxpayers short $1.3 billion on their investment. In addition, Fiat was only able to pay back the loans to the US and Canadian governments because the US Energy Department provided a loan of $3.5 billion so Chrysler can build a fuel efficient car. Fiat was unsuccessful in raising the funds privately which should tell you something about the prospects of repayment. GM used similar bookkeeping tricks to claim repayment of their loan and its stock is now trading at a post IPO low. The administration itself reckons the cost of the auto bailout at $14 billion.

The auto bailouts and whether the Obama administration can or should claim success is not the point though. That the administration and other elements of the government such as the Federal Reserve have continued to pursue policies intended to return the economy to the status quo ante is. I hasten to add that this administration is little different from the one it replaced in pursuing dubious policies in search of “recovery” rather than finding ways to midwife the always uncertain birth of future growth. Both the Bush and Obama administrations - and particularly the Bernanke Federal Reserve - have spent years trying to force the economy back to a mythical past that didn’t exist. The limits of this approach are seen today in a recovery that is anemic by any historical measure.

The recent spate of weaker than expected economic data is not a natural bump on the road to recovery. It is a pothole created by misguided monetary policy and an administration staffed by intelligent people who believe they can craft a future better than one that would emerge naturally - indeed one that is emerging despite the obstacles placed before it. It is easy to ridicule the valuations of the social media companies such as the recently IPO’d LinkedIn and the just announced and eagerly awaited Groupon issue (and I have done so), but those valuations tell us something about the state of the economy. The price of the shares is merely a reflection of a limited supply of new, innovative companies and a large supply of capital demanding new investment opportunities. Instead of encouraging more of this type of innovation, we’ve spent billions of dollars reviving banks and auto companies that, based on the recent action of their shares, are not considered attractive by the market.

Growth is created by people with new, innovative ideas with access to capital. America still has the entrepreneurial spirit required to generate innovation but economic policy over the last decade has gone about systematically destroying the capital and confidence needed to create a brighter future. The weak dollar policy first authored by the Bush administration and continued enthusiastically by the Obama administration has redirected capital away from funding innovation to assets that are least affected by devaluation such as real estate and commodities. Commodity and interest rate volatility created by Fed policy has produced a multi-trillion dollar derivatives industry that ties up corporate capital in complex hedging schemes - capital that could be put to better, more productive uses.

The myriad bailouts of the last few years have forced new capital into industries with a proven track record of failure. The banking industry gets most of the press and deservedly so, but it is just one of many. The auto industry destroyed capital on an epic scale before the intervention of government and the attached strings of electric car development ensure a future that looks much like the past. The ethanol industry has provided zero environmental benefits and would not exist absent hefty government subsidies provided by taxpayers who are left to wonder why their check engine light is now a permanent part of their dashboard display. Wind and solar power, as attractive as they are in the abstract, cannot solve our energy dependence problem and in the meantime attract capital based on subsidized revenue at the expense of companies without government guaranteed markets.

The Obama administration has further depressed innovation through heavy handed regulation. The recent case brought by the NLRB against Boeing demonstrates the degree to which the administration believes it can substitute its judgment for that of the market and is a warning to any companies considering locating facilities in the US. A foreign company considering building a new plant in the US will surely think twice before committing its limited capital. Ironically, the states most likely to lose are non right to work states such as Washington and Michigan which the policy was intended to help.

Health care and financial regulatory reform are two other areas that have created uncertainty. Both bills are more properly evaluated by the sheer weight of the printed bills than the actual content. The complexity of both bills is a demonstration of the power of the existing structure and not a reflection of the underlying difficulties of reforming either industry. In both cases, the missing element is market discipline, not a lack of regulation. Banking reform could have been accomplished more easily with a gradual and significant rise in capital requirements and a strict application of bankruptcy law instead of rules so complex that only the lobbyists who wrote them understand the implications. Health care reform manages to reduce competition (supply) while increasing the demand for services, a witches brew that ensures what will no doubt be termed a future “market” failure.

The US economy is an incredibly resilient system consistently underestimated by politicians and policymakers. The emergence of companies such as Groupon even in the face of the uncertainty of our times demonstrates that in concrete terms. The real estate market continues to heal in spite of government efforts to thwart the needed price adjustment. We will eventually build more housing in this country and it won’t be because of some enlightened government policy. It will be because, despite the obstacles, the market worked - again. Corporations will eventually re-invest their profits in new capacity but whether it is here or some other country depends on whether we trust them to make decisions or force them to seek favors in Washington, D.C. As I’ve said before, trust capitalism. It works.

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