It’s growth, stupid.

"Growth matters. It’s the whole ballgame. Growth creates mass prosperity. Growth gives hope. Growth pays for mistakes. From 1946 to 2000, the American economy averaged 3.5% growth per year. At that level, all of our national problems and worries. . . were manageable. From 2001 to 2010, the American economy slowed to 1.7% annual growth. All of our problems — deficits, debts, unemployment, sagging confidence – got worse."

--Rich Karlgaard, Forbes publisher

Alex Pollock, writing in the Wall Street Journal, sums up this century’s housing collapse, the source of our slow-growth economy:

As an old banker told me long ago, "Just remember this, young man: Assets shrink—liabilities never shrink!"

Along with Karlgaard, Pollock believes 2000, the year the “dot.com” bubble burst, represented a major turning point for our economy. Faced with an industrial recession and deflationary pressure from past overinvestment, Fed chair Alan Greenspan fostered a housing boom to counter the 1990s equity bubble. Pollock called this new, government-engineered boom the “Greenspan Gamble.”

Low interest rates drove housing sales that inflated from 1999 to 2006, creating a double bubble in housing and commercial real estate. The bubbles ran leverage and asset prices up to an unsustainable 90% increase, with housing peaking in the second quarter of 2006, and commercial real estate in the fourth quarter of 2007.

The bust that followed brought a national price drop of 32% from the peak for housing, and 42% drop from the peak for commercial real estate—a greater fall because commercial real estate lacks the large government programs and subsidies supporting home prices. This represented a combined drop in market values of over $8 trillion.

Those still suffering include delinquent borrowers, banks, domestic and foreign investors, plus Fannie Mae and Freddie Mac, government institutions Pollock calls “hopelessly insolvent with their losses paid for by taxpayers,” yet still funding the majority of new mortgage loans even up to $729,750.

Pollock, suggesting we don’t learn from our mistakes, says the (current Fed chair Ben) “Bernanke Gamble” now is pushing up stock and bond buying with zero short-term interest rates to offset the huge real estate losses. The Fed's latest actions seem to be son of the “Greenspan Gamble.” Bernanke’s purchase of about $1 trillion in mortgage debt has made the Fed, in Pollock’s words “the largest savings and loan in the world.”

I have been a believer (here and here) in Fed actions since 2000 to stimulate the economy, but now fear this market interference by two successive nominally-Republican Fed chairs is in the same pattern as the Obama administration’s failed effort to stimulate the economy through unprecedentedly massive (in peacetime) deficit spending.

As both Pollock and Karlgaard believe, we do better to leave growth to the private sector. Karlgaard has some specific growth-generating actions for policymakers:

– Strong and stable dollar

– Get federal share of GDP back under 20% (from 25% today)

– Simpler, flatter tax rates

– Lower corporate tax rates, in line with global competition

– Simpler, transparent regulation

– Pro-energy policy

– Immigration policy favoring skilled immigrants

– Stop war against business (e.g., Obama’s war on Boeing)

– Ban public employee unions

– Education reform (must break up teachers’ unions first)

– Patent reform (which currently favors large companies over entrepreneurs)

I would boil down Karlgaard’s list to:

– Drastically cut federal spending (get share of GDP back under 20%)

- Reform taxes (Simpler, flatter tax rates; lower corporate tax rates)

- Reduce anti-business actions (Simpler, transparent regulation; pro-energy policy; stop war against business, Boeing)

– Beat public employee unions (including teachers’ unions)

– Reform immigration (favor skilled immigrants)

Not so complicated. Run government to support business and entrepreneurs, reduce government’s size and clout, and put public unions, the enemy of economic growth, in their proper place.

Immigration reform is vital, and not widely accepted for what it is—central to America’s economic future.