Ides of March. In keeping with the March 15th date, we want to discuss the need to assassinate the idea that there is nothing positive or beneficial about government oversight of the financial system that supports CRE. The issue of how much government involvement is appropriate has been part of the national conversation since the Great Depression, and the argument has intensified with recent events, especially the Great Recession caused by the 2008-2009 financial crisis, which is still being felt today, despite some modest signs of recovery.
What is the Great Debate? The root causes and aftermath of the Great Recession have fueled a Great Debate, with one side arguing that more government oversight is essential to prevent the next crisis, and opponents fervently insisting government needs to take a step back and let the free market generate economic growth. The worst of the financial crisis may be behind us, but the government remains fixated on overhauling the financial system, and the election has brought the good, bad, and ugly aspects of the debate to the foreground.
The GOOD, BAD, and UGLY of GOVERNMENT OVERSIGHT
Some government oversight is positive. We’ve all heard that “everybody hates government,” but it can’t be denied that the U.S. government has been a catalyst for positive developments, such as highways, aviation and space advances, technology innovation, and the Internet. The government also helped build the world’s strongest capital markets and most transparent accounting procedures, and played a central role in preventing the recent financial crisis from capsizing the economy.
Negatives include bureaucracy and….socialism? On the negative side, it can’t be denied that the U.S. government is subject to excessive bureaucracy and has a well-documented history of wasteful spending. However, all large entities – including corporations – come with some bureaucracy, and the level of red tape and waste in the U.S. doesn’t exceed what is found in other countries. Despite what you may have heard, the U.S. actually has the least amount of government intervention of any major industrialized country, with the possible exception of the UK. The ugly side of the debate is the oft-heard accusation that government intervention leads inevitably to socialism, which doesn’t appear credible, considering the lack of examples of countries abandoning capitalist democracy for a socialist system.
Which side are you on? To help illuminate which side of the debate you stand on, we have put together a brief pop quiz:
TIME for a GREAT REVIVAL?
Can we shrink government without relinquishing dominance? Grover Norquist famously claimed his ideal would be to shrink government until it was “small enough to drown in a bath tub.” While the concept of mini-government has some appeal, it doesn’t take in consideration that the U.S. doesn’t operate in a void, and that other nations are increasingly intent on leveraging the power of government. The U.S. form of capitalism has been the envy of the world for the last 100 years, but hasn’t been as successful recently, as other industrialized economies have prospered, driven by substantial government backing, including Germany and Japan in the 1970’s and 1980’s, and more recently the BRIC’s.
Global implications. The U.S. economy grew by more than 3.0 percent from the 1970’s through the 1990’s, but slowed in the 2000’s and in 2011 with growth below 2.0 percent. At the same time, China, India, and Brazil have made tremendous gains, based on government policies and incentives that greatly favor domestic employment and exports. Can the power of government be leveraged successfully in the U.S. to reverse the trend? To make this happen, the Great Debate needs to evolve beyond left vs. right or big vs. small and to focus on how government can help the U.S. compete effectively in the world, given the rise of other industrialized nations.
Time for a Great Revival. While it remains unclear which side of the Great Debate will come out on top in the election, the volume of newly enacted and proposed legislation indicates the wave will continue beyond 2012. While increased oversight is unlikely to be met with cheers, smart and selective government action may be our best hope for initiating a Great Revival for the U.S. economy. Achieving a revival won’t be easy, however, since the U.S. has traditionally floated along, while competing industrialized nations have developed comprehensive and forward-looking plans for leveraging government to succeed globally.
Here are some key elements that a successful Great Revival strategy for the U.S. will need to incorporate:
- Restructuring the banking system has already inspired banks to go through the painful process of cleaning up balance sheets, and more is needed.
- Capital markets oversight. You can’t continue to have successful capital markets alongside an unsuccessful economy, because it builds tension between Main Street and Wall Street.
- Tax reform at all levels, including rationalizing effective tax rates.
- Tax incentives, designed to encourage more U.S. manufacturing and employment, while understanding there are some types of manufacturing that cannot be won back from China.
- Reducing all forms of government spending, including deficits, social programs, pension plans, and defense.
Bottom line implications for CRE. Smart and selective government oversight that helps inspire a Great Revival of the economy would inevitably provide a strong boost to all CRE property types. For example, job growth would benefit office and hotel, improved consumer spending and imports/ exports would drive retail and industrial, and wages and income gains would benefit multifamily. CRE players are justifiably concerned that excessive oversight could make banks overly cautious about CRE lending over the longer-term, but a conservative approach by banks also has an upside of lessening the likelihood of the extreme boom/bust cycles that have historically plagued CRE.
Pivotal Year. Our next report in this series will cover how government oversight is shaping the economy and CRE in the critical election year of 2012.