The employment report last week showed that the US economy added a mere 80,000 jobs in June with the unemployment rate stuck at 8.2%. Other economic reports last week showed similar trends toward unchanged and if you look back over the entire time since the end of the crisis portion of this great recession, the striking thing is how little things have changed. The unemployment rate first breached 8% in early 2009 and here we are 3 years later at roughly the same rate. The same can be said about a wide variety of economic measures. There have been fluctuations but the feeling is one of running in place. This is the status quo economy.

Hope and Change. That’s the slogan that got Barack Obama elected President in 2008. It was a forward looking campaign based on the American people’s natural optimism about a better future that could be realized if we overcame the fear of change. It was a 21st century campaign that captured the enthusiasm of its supporters through the use of new communications technology. The spontaneous organizing power of the internet and other social networking tools allowed a largely unknown candidate to challenge and defeat the entrenched power structure of the Democratic party. As the network expanded, leaders emerged, strategies developed; the network spontaneously adjusted at the local level to meet local needs and accomplish the goals of the entire group. It was a decentralized campaign that produced a spontaneous order to accomplish a shared goal. In other words, it functioned like a free market.

Almost immediately after the election however this spontaneous operation was systematically dismantled. The upper echelon of the Obama inner circle moved from campaign outsiders to administration insiders and their fear of the spontaneous nature of the campaign moved them to impose order on the network. The spontaneity that put them in power was quashed in favor of a more orderly, controlled and traditional political network to sustain it. President Obama embraced the market for hope and change to get elected. He has governed to protect the status quo and in the process extinguished hope.

The contrast between the Obama campaign and the Obama administration starkly demonstrates the difference between the dynamic, spontaneous nature of markets and the deadening effect of attempting to maintain the status quo. His campaign was dynamic and exciting; his administration has been dull and predictable. The policies of the Obama administration – and Bush’s before them – are designed to prevent the spontaneous changes that threaten the elites who benefit from the status quo. President Bush protected the existing structure of the financial system and those who benefit from it by proposing and enacting TARP. The irony of the emerging consensus that we need to break up the Too Big To Fail banks is that if the politicians had not intervened, the market would have solved that problem in quick order. What kind of banking system would have emerged if there had been no favoritism toward the large banks? Probably one similar to what everyone seems to want now – smaller banks operating more conservative business models. Fear of the market – fear of change – prevented us from transitioning to what would have been a better and safer system.

President Obama, despite his rhetoric of hope and change, is no less guilty of protecting the status quo. His bailout of GM and Chrysler, started under the Bush administration, saved the existing structure of a US auto industry that had failed. Yes, it saved the jobs of some existing auto workers and preserved the power of the UAW but at what cost? How would the auto industry have changed if Obama had allowed the bankruptcy process to proceed normally rather than intervening to protect the existing power structure? It is easy to say that without his intervention the industry would be worse off today but it is impossible to prove. We might have a more dynamic, innovative auto industry today, but fear of change by a President who campaigned on overcoming that fear prevents us from knowing what would have emerged.

Health care reform is quite possibly the greatest example of protecting the status quo by either administration. The President’s health care reform law is demonized by the right as a government takeover of the health care industry but that battle has already been lost. The rise in the rate of health care inflation over the last several decades has coincided with an increase in the percentage of health care spending that is funneled through third party payors whether government or private insurance companies. In fact, over half of  health care expenditures in the US are already paid for through government agencies and most of the balance is paid for by private insurance companies obtained through employers. Obamacare merely makes permanent this system of payment which is at the root of many of the problems with our health care system. In other words, it further entrenches the status quo. Fear of moving away from a system that has been in place for generations – even though it has produced sub par results – stifles innovation in the delivery of medical care.

This bipartisan protection of the existing structure of the economy is what is keeping us from realizing our economic growth potential. It isn’t new by any means but it is more obvious now as the efforts of the Federal Reserve prove ineffective in re-inflating the credit system that obscured the flaws of the existing system for so long. This existing structure is not only responsible for the recent financial crisis and the shortcomings of our health care system but also the rise in inequality of the last few decades. When those at the top are protected from failure by bailouts and from new competitors through regulation, the result is stagnation. Dodd Frank institutionalizes too big to fail and its maze of regulations raises significant new barriers to entry for those who wish to form new banks. Labor policies that protect existing workers make it more difficult for new labor market entrants to acquire new jobs and the skills for advancement. Health care policy that forces all payments through government and insurance companies makes it impossible for alternative, more innovative systems of health care delivery to emerge.

Protecting incumbent systems and firms in pursuit of short term stability is what has led us to our current stagnation. The instability and spontaneity of the market can be frightening at times but it is the only thing that encourages the creative destruction critical to economic growth. Thanks to technological change the ability to self organize quickly and challenge incumbent firms has never been greater but the barriers to change have never been higher. Getting out of the status quo economy requires tearing down those barriers. Hope and Change turned out to be an empty campaign slogan but we can restore the former if we embrace the latter.

For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Joe Calhoun can be reached at: jyc3@4kb.d43.myftpupload.com or 786-249-3773.

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