American prosperity requires capital freedom.

• Author: Giancarlo, J. Christopher
• Position: Essay

The Cato Institute was named after Cato's Letters, essays first published from 1720 to 1723 under the pseudonym of Cato, commonly known as Cato the Younger, who lived in Rome from 95 to 46 BC and was an implacable foe of Julius Caesar and stubborn champion of (lowercase "R") republican principles.

In our lifetime, the Cato Institute seeks to increase public appreciation for "principles of individual liberty, limited government, free markets and peace." It is the application of those principles to American capital markets and capital formation that we are here to discuss today.

What Happened to American Prosperity?

It is not a matter of opinion but a matter of economic fact that everywhere there are free and competitive markets, combined with free enterprise, personal choice, voluntary exchange, and legal protection of person and property, you will find the underpinnings of broad and sustained prosperity. These elements, wherever and whenever deployed, lift millions of people out of poverty.

Here at home, these elements are under attack by critics of our financial markets. These critics have lost sight of the fact that global capital markets remain the engines of rising standards of living and prosperity. These critics talk about separating markets from risk, as if they have no idea that risk and prosperity are invariably linked. They say risk can be extracted from the marketplace through centralized economic planning and direction. They say income inequality can be reduced through increased political control over people's economic choices. They say wealth redistribution should be tolerated by passing on to our children and grandchildren additional trillions of dollars in federal debt.

Meanwhile, these critics of free markets hardly ever talk about regaining broad and durable prosperity. Yet, prosperity was the common state of the American experience for us and generations before us. (1) And Americans still want prosperity to be the default state for their children. What we have today is just not good enough.

In fact, what we have today is simply the worst U.S. recovery from any recession since the Great Depression. Last year, the managing director of the International Monetary Fund, Christine Lagarde, dubbed current economic conditions the "new mediocre" (Lagarde 2014). That is a mild description for the state we are in. During the first quarter of this year, the U.S. economy actually shrunk by 0.7 percent. GDP has not grown by more than 2.5 percent for the past half-dozen years--the slowest rate of growth since the United States began compiling reliable economic statistics a century ago. That is less than the average annual U.S. economic growth rate and substantially less than a typical postrecession rate of growth (Lacker 2015, Walker 2013). (2)

The official U.S. unemployment rate has fallen steadily during the past few years. Yet, this recovery has created the fewest jobs relative to the previous employment peak of any recovery (Ferrara 2013). In this year's first quarter, the labor force participation rate hit a 36-year low of 62.5 percent. The number of Americans not in the labor force hit a record high of 93.7 million people. Part-time work and long-term unemployment are still well above levels from before the financial crisis (Kosanovich and Sherman 2015, Timiraos 2014). One in three Americans between the ages of 18 and 31 are living with their parents (Fry 2013), and, in one out of five American families, no one has a job (U.S. Department of Labor 2015).

Worse, middle-class incomes continue to fall during this recovery, losing even more ground than during the recession. Real disposable personal income is well below its projected prerecession levels. The number in poverty has also continued to soar to about 50 million Americans. That is the highest level in the more than 50 years that the census has been tracking poverty (Ferrara 2013). Income inequality has risen more in the past few years, while the prospect of working in a secure full-time job has greatly diminished in this new mediocre economy (Pofeldt 2015). (3)

As a former business executive, I can tell you that the plethora of federal regulations is a major drag on the U.S. economy. Mark and Nicole Crain (2014) report that regulations now cost the U.S. more than 12 percent of GDP, or $2 trillion annually; the average manufacturing firm spends almost $20,000 per employee per year to comply with federal regulations; and for manufacturers with fewer than 50 employees, the per-employee cost rises to almost $35,000. Is it any wonder that the rate of hiring is so abysmal? In a recent survey by PricewaterhouseCoopers (2014: 4), CEOs of American companies overwhelmingly cited overregulation as a barrier to capital investment that would otherwise stimulate job creation and wage growth.

Still, Americans remain an aspirational people despite the economic frustration of the past several years. Yet, they are increasingly worried they may soon fall out of their economic class (AllstateNational Journal 2013). I agree with Governor Jack Markell of Delaware, who recently wrote that Americans need jobs, not populism (Markell 2015). Americans want robust economic growth, not excuses based on bad winter weather. If we are to meet our obligations to the next generation of Americans, we must address head-on the challenges of the new mediocre and take steps to replace it with broad-based prosperity and full-time job creation.

Importance of Free and Competitive Capital Markets

The answer lies in economic freedom and opportunity: the same combination of ingredients that invariably leads to more prosperity--even for the poor--than does centralized political planning (see Lawson 2008).

Capital markets such as the stock and bond markets play an essential role in economic growth by marshaling resources and deploying them in productive ways. They serve as a link between savers and investors by shifting financial resources from surplus and waste to deficit and production. They allow the rational allocation of goods and resources, spurring expansion of trade and industry. And, yes, regulators have a key role to play in capital markets by making sure they are well ordered and not manipulated by bad actors, misconducted by fraud, or misused for political purposes.

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