Draining the economy.

• Author: Weidenbaum, Murray
• Position: ECONOMIC OBSERVER

SEVERAL UNDERLYING trends are emerging from the crossfire of confusing statistics and unprecedented policy challenges that faced the incoming Obama Administration in January. The period of what seemed to be a free-fall in the U.S. economy and in the financial system seems to be behind us. Surely, the declines now are at a much slower rate. The good news is that this is the usual prelude to an economic upturn. However, the long-term trend may be more powerful and much less favorable to business and thus to American economic performance.

The apparent disconnect between short-term changes and the longer term is due to a variety of actions. Most clearly, the Obama Administration is succeeding in shifting the balance between the public sector and the private sector in favor of the government. It is doing so in a great many ways. Despite some of the soothing rhetoric to the contrary, business is at the receiving end of a host of unfriendly policy and procedural developments. These changes range from a renewed emphasis in antitrust prosecutions, to increased taxation of those who do the saving and investment, to leaning on employers and investors in order to support union activism, to an impending expansion of government regulation, especially of financial institutions and labor relations, The rapidly rising deficit means that more of private savings will be taken by the government; less will be available for private investment--and thereis much more in the offing, including costly new tax and regulatory policies on energy and the environment.

The cumulative effect will be felt over the years. American business will experience a much weaker trend in capital investment and thus in overall sales and earnings growth than in the previous decade. At the same time, rising protectionist sentiment will make it more difficult for U.S. firms to compete in the global economy. New protectionist policies will encourage investors to shift resources and decisionmaking to attractive overseas locations--markets with lower tax rates and less onerous regulation. Near the end of 2009, the American economy remains mired in the deepest and longest recession since World War II. While there have been a few weak signs of an upturn, it is unlikely that 2010 will be a year of rapid overall growth. It looks as though the unemployment rate will reach at least 10% before it starts to decline and that a mild recovery will remain the prevailing optimistic scenario. The...