Janet Yellen (Federal Reserve chair) received a lot of press in last week after the Fed’s meeting, where she acknowledging that monetary policy can’t really solve the slow growth rate of the U.S. economy.  She, as many other economists, believe there are structural problems which leave us in a “new normal” of lower economic growth that monetary policy can’t fix.

Yellen in the past has ascribed the low level of rates mainly to lingering headwinds from the financial crisis — tight mortgage credit, for instance — and suggested that they would dissipate over time.  On Wednesday, though, she also pointed to more permanent forces that could depress rates for longer, namely, slow productivity growth and aging societies, in the U.S. and throughout much of the world.

I’m half in agreement here; our slow economic growth cannot be fixed by monetary policy (although the “first do no harm” maxim is nowhere more important than Fed policy*), but there are other forces at work.  I believe the longer term problems are on the supply side of the economy, as tax and ever increasing regulations dampen the incentives to work, save and invest.  So to examine these regulations, let’s turn to the heartland.

On Monday I was fortunate enough to travel to visit with two alumni of the university; one a Private Equity manager, the other a Chief Financial Officer of a Fortune 500 company.  Both are doing very well, and honoring God with the way they conduct their business.  But both had a significant part of their focus in dealing with the ever-increasing regulatory burden.  The first, our private equity fund manager, talked about the stack of paper that was required of his firm because of Dodd-Frank.  He was fortunate in that his funds are less than the $100M threshold; he has a rough 4″ height of paper to submit each year, rather than the ~2′ of paper that would be required if his fund were greater than $100M.  As it is, I asked him to put a rough cost of Dodd-Frank regulatory compliance.  He said that given his policy of wanting to be fully transparent with the public, much of the regulatory requirements he would do anyway, but much he would not.  His overall estimate was 10-15% of the cost of doing business with Dodd-Frank, but he didn’t put a specific # on the part of Dodd-Frank that he wouldn’t do (the conversation steered another direction).  Yet from what he described certainly 5% of costs is not unreasonable.  You may think that 5% is not much, but the point is that its sheer waste–and comes at the expense of new businesses getting off the ground.  Mrs. Clinton wonders why there is not more entrepreneurship; she could take a look at Dodd-Frank.

In the second visit, our CFO brought in another CU alumni at his firm (from the tax division) that had just completed a complex tax project that allowed the firm to repatriate several hundred million dollars without paying additional U.S. taxes.  U.S. corporate tax rates are the highest in the world, and after international firms pay taxes in the country where the profits were made, they would have to pay taxes again to the U.S. if they bring the money back to the U.S.  I don’t want to go down too far on this path (perhaps another blog post) because the point is that firms are almost always going to obey the law.  But they are not going to do what the powers that be want them to do.  They are going to operate within the law to have their firms make as much profit as they are legally allowed to do.  But the CU alum that talked about the process was the head of a large team that had taken several weeks to accomplish this–and all of this is sheer waste from an economic standpoint.  The government didn’t get any revenue, the firm consumed resources simply to gain access to its own money, and we have less total output than we would otherwise have.  So government policies encourage the move toward highly skilled, highly remunerated jobs, while resulting in lower growth and fewer lower skilled jobs.

We may be on a new normal of at best 2% economic growth, but it is because of the choices we continue to make.  We can do better.

* Regular readers know that I am a critic of monetary policy as causing harm; artificially low rates** discourage real saving, while the Fed’s QE has caused significant distortions in asset pricing, which itself causes a realignment in the economy inconsistent with true consumer preferences.

** I have no idea if rates right now are too low or not; there are significant arguments that the Fed kept interest rates too high in the aftermath of the crisis.  My main concern is allocation of credit within the economy–picking favorites–rather than the price of credit.