Taxes and costly regulatory threats hobble our economic recovery

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To lift us from recessions, our nation has long relied on two federal policies -- a fiscal program of stimulus spending and a process of monetary easing conducted by the Federal Reserve System.

For either policy to be effective, an environment that incites vigorous private investment spending must be in place. This requires, at a minimum, an appropriate set of tax and regulatory policies, programs we sadly, but needlessly, lack today.

Instead, businesses face taxes and regulations that are much more harsh and restrictive than in past recessions. Consequently, the current recovery is predicted to be slower, more halting, and of longer duration than those in the past.

Failure of our current policies to spark significant investment activity highlights the need for reversing such programs.

Maintaining consumption via stimulus spending and other programs helps the economy tread water while it goes through its painful adjustment phase. This process helps brings forth conditions for a real stimulus, a significant increase in investment spending, and an arousal of animal spirits.

While our recent experience has been disappointing, it has reinforced a firm belief: Consumption spending is insufficient to spark risky investments. Other ingredients are essential.

STIMULUS SPENDING: We began the recent recession with the optimistic belief that a large flow of stimulus spending, accompanied by threats of tax increases aimed primarily at risk-taking, wealthy payers would be sufficient, in short order, to advance us to a firm recovery.

The one sure way to recover from economic decline is for government to reach for the taxpayer's checkbook and spend the funds. Spend on virtually any object, including an open invitation for unbounded congressional earmarks. Consumers were overwhelmed with "clunker" programs of assorted shapes and sizes as well as special tax deductions and tax credits.

Reinforcing these acts, the Federal Reserve System flooded banks with reserves, increasing the monetary base -- funds that enable bankers to multiply loans and deposits -- by more than 1000 percent, an unprecedented rate of increase.

The latter helped stem the financial crisis, but left a legacy of a potentially inflationary hazard, which we are beginning to experience today. The double-barrel stimulus from both fiscal and monetary policies was disappointingly ineffective, and the expected upsweep in investment spending a miserable failure.

The Fed, however, has gone beyond stemming the crisis, almost as if the White House has handed the stimulus baton to them. For the past few years, it has attempted to stimulate the economy with a virtually zero federal-funds rate, and another $600 billion of U. S. Treasury Bond purchases, resulting in a base of about $2.5 trillion.

INVESTMENT SPENDING AND RISK: These disappointments suggest a lack of investment spending, an unwillingness of business to assume risky ventures. Surveys of business CEOs reveal that they rank "difficulty in forecasting demand" as the most important factor in evaluating new projects. This translates into the riskiness of the project.

However, what is most important is that tax policies, growing hostility toward free enterprises, constant threats of tax increases, and accelerating increases in costly government regulations all act to magnify these risks, forcing decision-makers to shelve otherwise favorable investments, thus needlessly delaying a recovery.

FAILURE OF STIMULUS SPENDING: Reports by Robert J. Barro of Harvard University (The Wall Street Journal, Feb. 23, 2010) and Michael Boskin of Stanford University (Journal, Dec. 1) find little or no evidence of a stimulus effect. Likewise, the mass of empirical data thrown up by the media over the past three years adds little support.

Of course, welfare spending, whether corporate or individual, is hardly stimulating. Following their expenditure, an adequate supply of these funds needs to be channeled into the right hands -- the risk-takers . This requires that proper incentives be in place.

Smoothing the path to risky investments means eliminating the threat of rising taxes and reducing other onerous government burdens. If stimulus spending is to be effective, a friendly tax and regulatory policy must exist that connects spending to business incentives required to adopt risky investments. Taking these incentives as given is naïve.

INADEQUACY OF MONETARY EASING: Similarly, monetary policy stands little chance of being effective if tax and regulatory policy remains inhibiting. Entrepreneurs have little incentive to borrow, even at historically low rates, if risk-taking incentives are buried by threats of further tax increases and mounting government regulations.

Conventional wisdom, however, dictates that either stimulus or monetary easing suffices to bring forth a strong recovery. While the famous economist John Maynard Keynes was keenly aware of the importance of risky investments, his followers chose to emphasize consumption, as being the sure door to the Promised Land and the rest is history.

Even former President John F. Kennedy was impressed with the importance of a favorable tax climate as a catalyst for private investment. Developing this favorable environment is neglected because it is taken for granted. This assumption is wrong .

In contrast with previous recessions, business risk takers in the current downturn face a formidable triple burden: (1) ominous, continuous threats of tax increases, (2) a decidedly hostile business environment, and (3) costlier new regulations, portending a more sluggish, and a much lengthier, recovery than previous recessions.

This is not good news. Yet with simple changes in public policy, we can stop punching ourselves in our noses. Clearly and compellingly since stimulus spending and monetary ease have failed us, our only sensible alternative is tax and regulatory reform. The need is urgent.

(The writer is a professor emeritus of financial economics from the University of Georgia. He lives in Aiken, S.C.)

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robaroo 06/05/11 - 09:23 am
Not enough regulation is just

Not enough regulation is just as bad as too much regulation. It is hard to find the right balance. Weak environmental laws are just another way to let the crooks steal from future generations.

If the stimulus had worked, the country would be on track right now. Tax cuts without corresponding spending cuts are what got us into today's mess. Congress needs to make the hard choices to balance the budget.

No comment on all the people who don't work but get a check from government anyway? Isn't that a huge drag on the economy as well?

sconservative 06/05/11 - 09:43 am
Central planning doesn't

Central planning doesn't work. There are too many variables. Adam Smith's "invisible hand", whereby 310 million Americans make unconnected decisions which stimulate good things and discourage losers, actually works. The Index of Economic Freedom at shows that the United States is going in the wrong direction. Herman Cain has a very good program to reverse that. With Newt Gingrich as his Chief of Staff, his lack of a political background will be a plus. Herman knows Americans; Newt can get the legislation passed.

WW1949 06/05/11 - 11:59 am
No comment on all the people

No comment on all the people who don't work but get a check from government anyway? Isn't that a huge drag on the economy as well?

Robaroo are you including those that draw Social Security among those that do not work? They paid into the system and are due their check. However those that have never paid into anything are not due anything period. They should be cut off now and all programs be reduced and ALL government spending reduced to include retirement and medical benifits to all government employees because they are much better than any that the private sector has. What makes them better and deserve more?

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