Common sense points the way to real economic recovery

  • Follow Opinion columns

It is a pleasure when friendly skeptics, as well as other dubious groups, finally begin to implicitly agree with one’s major public policy conclusions. But it is mildly disappointing when they fail to grasp the main point of the argument leading to those results – the overwhelming importance of incentives in our free-market, competitive economy and that people be given the opportunity to be rewarded. So-called stimulus spending, which is overwhelmingly emphasized by White House economists, plays at best a secondary role.

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.)

Comments (2) Add comment
ADVISORY: Users are solely responsible for opinions they post here and for following agreed-upon rules of civility. Posts and comments do not reflect the views of this site. Posts and comments are automatically checked for inappropriate language, but readers might find some comments offensive or inaccurate. If you believe a comment violates our rules, click the "Flag as offensive" link below the comment.
deestafford 10/27/13 - 09:10 am
What a great column!

The problems center around Obama's and those around him who believe that:

The government is the solution to all problems.

The rich got rich because they stole their wealth from the poor when they weren't looking and who didn't really know they had wealth to be stolen.

America is a country founded and colonized by rich white people who did nothing but plunder its environmental riches from the peace loving natives.

Businesses and profits are evil because they foster inequity. Because Obama and more than 96% of his appointees have no business experience there is no concept of how businesses and profit margins spur the economy.

As far as the stimulus is concern. The part that went to the states was to pay off union government employees so they would stay on the job. Remember the ignorance of Obama showing when he found out "shovel ready projects" weren't really "shovel ready" at all? The man is clueless when it comes to how the country works.

If we can ever get a conservative, free market president coupled with a conservative congress who believed in turning this mighty economic engine loose with energy exploration, a consumption (aka Fair Tax) tax, and repeal of regulations which have hog tied the private sector we will see growth that would make the growth of the 50's look anemic.

ymnbde 10/27/13 - 09:19 am
we're suffering the hangover after a

long night of binge liberalism
very well-written article...

teaparty 10/27/13 - 10:25 am
Dr. Beranek said, "This is

Dr. Beranek said, "This is common sense!" It seems that 'common sense' is not so common among liberals.

teaparty 10/27/13 - 10:26 am
Written by Dr. Jack Wheeler

Written by Dr. Jack Wheeler

The O-man, Barack Hussein Obama, is an eloquently tailored empty suit. No resume, no accomplishments, no experience, no original ideas, no understanding of how the economy works, no understanding of how the world works, [filtered word], nothing but abstract, empty rhetoric devoid of real substance.

He has no real identity. He is half-white, which he rejects. The rest of him is mostly Arab, which he hides but is disclosed by his non-African Arabic surname and his Arabic first and middle names as a way to triply proclaim his Arabic parentage to people in Kenya . Only a small part of him is African Black from his Luo grandmother, which he pretends he is exclusively.

What he isn't, not a genetic drop of, is 'African-American,' the descendant of enslaved Africans brought to America chained in slave ships. He hasn't a single ancestor who was a slave. Instead, his Arab ancestors were slave owners. Slave-trading was the main Arab business in East Africa for centuries until the British ended it.

Let that sink in: Obama is not the descendant of slaves, he is the descendant of slave owners. Thus he makes the perfect Liberal Messiah.

It's something Hillary doesn't understand - how some complete neophyte came out of the blue and stole the Dem nomination from her. Obamamania is beyond politics and reason. It is a true religious cult, whose adherents reject Christianity yet still believe in Original Sin, transferring it from the evil of being human to the evil of being white.

Thus Obama has become the white liberals' Christ, offering absolution from the Sin of Being White. There is no reason or logic behind it, no faults or flaws of his can diminish it, no arguments Hillary could make of any kind can be effective against it. The absurdity of Hypocrisy Clothed In Human Flesh being their Savior is all the more cause for liberals to worship him: Credo quia absurdum, I believe it because it is absurd.

Thank heavens that the voting majority of Americans remain Christian and are in no desperate need of a phony savior.

He is ridiculous and should not be taken seriously by any thinking American

Back to Top
Search Augusta jobs