MY PREVIOUS columns have stressed the reason for our sluggish recovery– the presence of weak private investment. Indeed, the heralded stimulus spending, both fiscal and monetary, which was supposed to assure us of high-levels of private investment, has failed miserably. The ratio of private investment to gross domestic product remains at levels no higher than at the bottom of previous cycles.
And robust investment is the key to vigorous recovery. The principal factor behind this dismal investment has been government policies: rising heavy income taxes; the oppressive, constant threat of even more taxes; and the relentless spreading of costly government regulations, all of which add to massive increases in the risk, or uncertainty, of gaining rewards from private investment. That this speaks louder than a thousand words is common sense.
THESE FEATURES of private investment risk are at alarmingly high levels. But it is gratifying when independent researchers – economists Scott Baker and Nicholas Bloom of Stanford University and Steven Davis of the University of Chicago – confirm our predictions. They developed a statistical measure of public policy uncertainty, which shows that such uncertainty in mid-2011 was more than twice its average of the past quarter-century, consistent with our forecasts (see William Galston, The Wall Street Journal, Sept. 28). Public policy uncertainty is crucially related to business uncertainty.
These authors explain: “When businesses are uncertain about taxes, health care costs, and regulatory initiatives, they adopt a cautious stance. Because it is costly to make a hiring or investment mistake, many businesses naturally wait for calmer times to expand. If too many businesses wait to expand, recovery never takes off.”
THE CRUX OF the uncertainty problem is to realize that incentives drive the economy. It matters not if we engage in $1 trillion of stimulus spending. People expect to be rewarded for their efforts whether for work, for saving from their incomes or for their risky investments. In that last instance, to risk an investment they must at least be persuaded that its expected rewards be sufficiently attractive relative to its risk to undertake the investment.
This is common sense! If the undertaking is deemed too risky, the proposed investment is shelved, rejected or abandoned. And expanded employment is not only foregone, but growth in the overall economy is retarded. Unfortunately, we don’t collect statistics on this outcome, only on actual hirings and layoffs.
The key recovery incentive that must be restored is the incentive to engage in private investment. Not only must politicians and the media restrain their unprecedented anti-business attacks, they must re-examine their paranoid obsession with income inequality and how it harms growth in gross domestic product. Unbounded appetites for more burdensome and costly regulations also must be curbed. Just eliminating these threats would calm fears considerably. But actually reducing taxes, or simplifying the tax code, would signal the greatest step toward reconciliation, and toward a friendlier atmosphere. Then watch the acceleration in investment, employment and GDP growth.
TO MAKE MATTERS worse, government does not even know how to lighten regulation. Last year Congress passed the Jobs Act, which was to cut regulatory red tape and make it easier for small businesses to obtain financing for new ventures. The aim was to create new jobs. Instead the Security and Exchange Commission, the regulating agency appointed to implement the law, significantly increased regulation!
If the Federal Reserve System relaxes its zero interest rate policy, it is true that this will tend to increase businesses’ cost of capital and reduce the expected profits from their investments. But the increased benefits from risk reduction (lower taxes, reduced regulatory compliance costs, and more certain tax rates) will swamp these reduced profit effects, resulting in net positive profits.
Critics may ask why we didn’t have such stunted recoveries in the past. We did. The Great Depression was needlessly prolonged by the aggressive policies of President Franklin D. Roosevelt. FDR led the charge to institute, up to that time, the greatest onslaught of government regulations in our history. But the outpouring of regulations and government controls that started with President George H. W. Bush, and continues to the present date, is staggering, unbelievable and shocking (see Clyde W. Crews’ 2013 report “The 10,000 Commandments,” from the Competitive Enterprise Institute).
Among our children, public schools promote the worship of the Office of Safety and Health Administration, Department of Labor, National Labor Relations Board and the Environmental Protection Agency, to name a few. But in the training of our children, we note that Rodgers and Hammerstein’s unforgettable South Pacific lyric “they have to be carefully taught” applies with equal, if not more, vigor to this bias.
SINCE SEVERAL more economists, with their compatible findings, have climbed aboard the excessive-risk express, and assuming that White House economists are objective and sincere, what further evidence does the Obama administration need to move forward to reduce public policy uncertainty and abandon its reckless policy of governing by crisis management?
(The writer is a professor emeritus of financial economics at the University of Georgia. He lives in Aiken, S.C.)