State of the Union Enhanced by Better Business-Government Relations

In last night's State of the Union address, President Barack Obama was triumphant in taking credit for a growing economy, being "as free from the grip of foreign oil as we've been in almost 30 years," and noting that Russia's economy was "in tatters." What the president failed to acknowledge was that entrepreneurs largely drove these results.

Political, regulatory, media, and activist actors, what I call shapeholders, at times encouraged and at other times discouraged the risk taking that generated these public goods. Better relations between business and shapeholders offers great potential to improve the state of the union.

While Washington fiddled and burned with rage, entrepreneurs put it all on the line to relentlessly pursue the discovery and creation of a better mousetrap. Many fail, but those who succeed create a better life not just for themselves but for the world at large. Today's innovators have done just that, bailing out Washington's inaction on the economy in the process.

As political acolytes of Friedrich Hayek's embrace of market forces and of John Maynard Keynes' adherents who prefer government-driven stimulus disputed the appropriate response to the slowest recovery since President Harry Truman, the American energy industry innovated to tap natural gas resources previously locked within shale rock formations, boosting economic growth. This fueled a surge in production and precipitated a plummet in the price of energy. As the president trumpeted, this saved the typical family "$750 at the pump." To be clear, it was private-sector innovation that produced this public good.

In explaining the return to growth, Fed Chairwoman Janet Yellen said the global plunge in oil prices is "likely to be, on net, a positive" for the U.S. and compared lower prices to a tax cut. Best of all, it is a stimulus that will likely reduce our deficits rather than increase them.

Earlier shapeholders seeking to support private initiative set the table.

  • English jurist William Blackstone affirmed in the 18th century that under common law, the individual, not government, owned their property from "the air above to the ground below." This allows American citizens to benefit from tapping resources under land they individually own. Most other nations are under a civil law system where the state owns mineral rights, giving individuals no incentive to explore.
  • The initial research into the use of shale was supported in the 1970s and 1980s by government incentives for oil and gas companies.
  • Yet credits that spurred new technologies were allowed to lapse, and remaining credits are routinely demonized today. Producers have faced increasing hurdles in pursuing shale production, including New York Governor Andrew Cuomo banning its pursuit in the state.

    Rising to the challenge of overcoming the hurdles to making shale production pay off was a son of immigrants in Galveston, Texas, George P. Mitchell. As government turned from wind at its back to wind in the face of shale innovation, Mitchell struggled for 15 years to make fracking economical, all the while being told he was nuts. Finally in 1997 he succeeded and sparked the path to America's energy independence and economic renewal.

    While Mitchell was not motivated by geopolitical aims, the reduced energy prices he precipitated have unbalanced America's foes despite our foolish reduction in support for the military and foreign policy stumbles.

    While politically produced sanctions may play a part in curtailing mischief by Russia and Iran, the real blow to their economies has been the hole in their governments' budgets from reduced energy receipts due to the falling price of oil.

    As the U.S.-led initiative to restore security in Syria faces obstacles, this reduction in oil prices gives a glimmer of hope. With their own challenges maintaining stability back home, Russia and Iran may find it harder to support President Bashar al-Assad. With their wealth taking a hit, Gulf patrons may trim their economic support of radical rebels.

    Some even credit the United States' recent rapprochement with Cuba on Cuban nervousness about the ability of Venezuela, another American nemesis, to continue to prop up their economy.

    To continue this success, it is vital for the energy industry, indeed all enterprises, to engage with shapeholders in a manner that addresses valid concerns as they pursue commercial success in a way that benefits society. It is essential for business leaders to learn these skills.

    To propel future innovation it is equally essential that shapeholder's seek relationships with business that encourages, not discourages, their generation of public goods.

    Business and government effectively engaging with one another holds powerful potential to truly brighten the prospects of the middle class and improve the state of our union.

    Hon. Mark R. Kennedy (@HonMarkKennedy) leads George Washington University's Graduate School of Political Management and is Chairman of the Economic Club of Minnesota. He previously served three terms in the U.S. House of Representatives and was Senior Vice President and Treasurer of Federated Department Stores (now Macy's).