“Son of Stimulus” and Regime Uncertainty
posted at 4:00 am on September 12, 2011 by Karl
When the New York Times published an article titled, “Employers Say Jobs Plan Won’t Lead to Hiring Spur” on a Friday night for Saturday’s print edition (likely remaining its least read edition), I almost dared hope that it was the equivalent of a Friday night document dump. Perhaps the NYT was going to do some reality-based reporting, even if buried when few would read it. But no — Motoko Rich’s piece was ultimately premised on the same simplistic, Keynesian assumptions underlying Pres. Obama’s “Son of Stimulus” bill:
Companies are focused on jittery consumer confidence, an unstable stock market, perceived obstacles to business expansion like government regulation and, above all, swings in demand for their products. (Emphasis added)
*** Administration officials and some economists, of course, say they believe the president’s plan, if adopted, could help increase demand more broadly. The proposed payroll tax cuts for individuals should spur consumer spending and in turn, prompt companies to hire more people.
The latest NFIB economic trends survey (.pdf) would tell you that the combo of taxes and regulation greatly exceeds poor sales as the biggest problem facing small businesses (taxes alone are cited almost as frequently as poor sales). Moreover, if you choose to disbelieve the running-dog capitalists surveyed by NFIB, official government statistics would tell you inflation-adjusted personal consumption is higher now than the third quarter of 2007.
Thus, even by Keynesian standards, the economic culprit would be business investment. Coincidentally, Prof. Greg Mankiw, a Romney advisor and a bit of a Keynesian himself, addressed the business investment problem in the NYT the very next day, including not only Obama’s tax policies, but also trade policy and regulation.
The problem likely runs deeper, even by establishment standards. Quoting Mankiw:
The great economist John Maynard Keynes suggested that investment spending is in part determined by the “animal spirits” of investors, which he described as “a spontaneous urge to action rather than inaction.” Recessions occur when optimism turns to pessimism, and businesses are reluctant to place bets on a prosperous future. Recovery occurs when investor confidence returns.
As Mike Whalen noted recently, the federal government is now seen as so fiscally irresponsible that ostensibly Keynesian stimulus schemes now crush consumer confidence and the “animal spirits” of job creators:
[I]f Uncle Sam were a rock-solid financial entity with low debt to value and he had judiciously used debt for capital improvements that were accretive in value, as the biggest dog on the porch, a stimulus might work.
But with a national debt of more than $14 trillion and unfunded, future “off the books” debt of Social Security and Medicare combined at $104 trillion in present value, according to the Dallas Federal Reserve, Uncle Sam ain’t the man he used to be. This in turn makes American businesses that are sitting on a pile of cash focus on deleveraging. The American consumer is doing the same. In fact, from where I sit, it appears as though everyone except Uncle Sam is working like mad to strengthen his balance sheets. The legitimate fear across the country is that Washington’s refusal to join our common-sense parade will result in higher taxes, more regulations, more inflation and Japanese-style stagflation. In other words, Washington’s attempts at stimulus through spending are having the opposite effect. Businesses and consumers stay hunkered down. (h/t Aaron Worthing)
Economist and economic historian Robert Higgs theorizes that regime uncertainty — the widespread inability to form confident expectations about future private property rights in all of their dimensions — is a more evolved iteration of the Keynesian “animal spirits.” However, fear of current and future Obama administration policies does not fit neatly into Keynesian computer models (which haven’t worked well) or progressive ideology (ditto) and thus must be dismissed as a cause of economic malaise by Keynesian progressives. That’s science!