Is the Economy Better Off Without Washington?

Political meddling has done nothing. Maybe doing nothing will work instead.

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With a near-constant parade of mediocre-to-dismal economic data over the past several months, the knee-jerk reaction from politicians and policymakers has been to either argue for more intervention and more stimulus money or demand less regulation and less taxation.

But amid all of the partisan bickering about what and how much the government should do to help the economy, another camp has argued against the government doing anything at all. Critics say government intervention has done about as much harm as good, and the best thing Washington could do for the economy at this point would be to take the back seat and let the private sector drive the recovery, regardless of how slow it might be.

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"The economy is not in recession right now no matter what anyone says," David Kotok, chief investment officer at Cumberland Advisors, told Politico's Ben White. "It's growing slowly. The best thing Washington can do now is just to do nothing. Don't get in the way. Don't mess things up ... Leave us alone for a couple of years and the private sector will take care of it."

Other than the Federal Reserve's recent monetary policy move (dubbed Operation Twist) designed to keep interest rates low for the next two years in hopes of spurring borrowing activity, not much has been done much to help the economy. "Many worry U.S. policy officials are out of bullets," Jim Paulsen, chief investment strategist at Wells Capital Management, wrote in a recent note to clients. "The Fed has already provided massive liquidity and lowered interest rates to zero and fiscal authorities look hopelessly gridlocked until after next year's election."

Nevertheless, the private sector has added about 2 million jobs since January 2010—more than 100,000 jobs just in September, according to the most recent Bureau of Labor Statistics data—all in spite of lunatic brinkmanship politics in Washington and fears of the Great Recession Part II.

So, can the economy fix itself if politicians stay on the sidelines?

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Business craves predictability and certainty, Kotok says, both of which have been conspicuously absent thanks to the political shenanigans overrunning Washington in the past several months. "The response of business is to wait and defer because of uncertainty about policy," Kotok says.

But, if politicians were to establish a policy freeze and hold off on implementing new regulations, American businesses would begin to expand and hire again, Kotok argues. "People would be able to make decisions with a sense of what's going to be in place for the next two years or so," he says.

Admittedly, that would mean asking politicians to do something they are loath to do: stop meddling. But as the excess negativity generated by the debt ceiling debacle begins to wear off, the evidence is in the numbers. Small business optimism inched up incrementally for the first time in seven months. While confidence still sits at severely depressed levels, more firms are reporting they plan to hire.

"The good news is obvious: the small business optimism index did not go down," IHS Global Insight economist Chris Christopher wrote in a recent report. "The bad news is that most small businesses feel that government regulation and taxes are excessive."

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Seeing that small businesses have been the main engine of job creation over the past two decades, further economic hindrances in the form of regulations could be disastrous for the nation's unemployment outlook. That's part of the reason President Obama's jobs bill offers incentives such as payroll tax breaks and tax credits for businesses that hire, but it doesn't solve the problem of persistently low confidence in the economy among businesses and consumers.

It's extremely unlikely the federal government would ever completely bow out of economic policymaking. But with the American Jobs Act likely to stall in the Senate—a victim of opposition over stimulus spending and a tax surcharge on millionaires—more uncertainty and more economic stagnation could be on the way. After all, messy politics lead to messy policymaking, and while the U.S. economy might not be technically in recession, for many Americans and businesses it sure feels like it.