- - Monday, September 29, 2014

Cheerful headlines last week celebrated an uptick in holiday hiring and expanded economic growth in the latest quarter, but the woods are dark and deep and we’re still not out of them. Robert E. Hall, an economist at Stanford University, details the “lasting harm to the U.S. economy” in a new paper from the National Bureau of Economic Research. A full and true recovery will require more than a few quick fixes.

The Great Recession’s most serious casualty has been the loss of investment. Instead of putting capital toward expanding business opportunities, companies and investors are hoarding cash out of a fear of losing it, and there’s uncertainty about expanding taxes and red tape.

Capital stock — the inventory of factory, equipment and intellectual property — is down more than 13 percent from before the financial collapse. Mr. Hall sees in the numbers a decline in overall productivity that is unrelated to the financial collapse. It’s what Jimmy Carter described in his famous 1979 malaise speech. Then as now, Washington feeds on the vitality of the U.S. economy so that government can grow. Malaise is real, but talk, as Mr. Carter learned then, and President Obama is learning now, won’t cure it.

Companies went on defense when they saw the government’s grip tightening during the economic slowdown. For their own survival, they sought to minimize all risks. Innovation suffered, because there’s no advance without risk. Productivity gains require a sustained drive toward technological innovation.

Investors sit on the sidelines because they demand confidence and clarity in the regulatory and tax environment before lending their funds to the slow and expensive process of improving a factory or opening a new enterprise. Instead of clarity, investors see fog and murk.

This starts a vicious cycle. Workers can’t get a bigger paycheck unless they’re more productive. They can’t be more productive without the support of investment in new equipment. Some households will never make up the lost pay.

The situation is made worse by federal and state governments that have their eyes on ever larger pieces of those diminished paychecks to feed an unchecked spending addiction. The national debt of $17.7 trillion — and growing — isn’t going to pay itself off. Capitol Hill and the White House have shown no interest in the entitlement reform that is absolutely required for long-term economic health.

Within a decade, tax payments for entitlements and interest on debt will absorb 77 cents of every dollar sent to Washington. Some states are in worse shape, facing debt in the trillions for unfunded public-sector pension payouts. Avoiding long-term disaster requires moving out of the way now, not later.

A blip of economic good news can’t excuse complacency. It’s a signal of how ready Americans are to return to prosperity. They want to work, invest, grow, innovate and succeed. They deserve a government willing to reduce itself so that private enterprise can do the job.

Maintaining the status quo is politically easy because it avoids short-term pain. Lasting recovery, which means more than a few temporary holiday jobs, requires a reversal of priorities. Government must restrain itself so that business can restore the balance of investment and innovation, breaking the cycle of malaise.

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