Putting the cart before the horse (manure)
I do not expect Chicago School economists to favorably review the Obama Administration’s economic policy, but to suggest that those economic policies, not only those which have been passed (The American Recovery and Reinvestment Act) but those which have yet to pass or are simply on its wish list are hindering an economic recovery – a claim made by Gary Becker, Steven J. Davis and Kevin Murphy in this WSJ Op-Ed piece – without providing any real evidence to support your claim is weak. Call it a serious case of putting the cart before the horse manure. Here’s an excerpt from their op-ed:
In terms of discouraging a rapid recovery, other government proposals created greater uncertainty and risk for businesses and investors. These include plans to increase greatly marginal tax rates for higher incomes. In addition, discussions at the Copenhagen conference and by the president to impose high taxes on carbon dioxide emissions must surely discourage investments in refineries, power plants, factories and other businesses that are big emitters of greenhouse gases…
Even though some of the proposed antibusiness policies might never be implemented, they generate considerable uncertainty for businesses and households. Faced with a highly uncertain policy environment, the prudent course is to set aside or delay costly commitments that are hard to reverse. The result is reluctance by banks to increase lending—despite their huge excess reserves—reluctance by businesses to undertake new capital expenditures or expand work forces, and decisions by households to postpone major purchases.
We have an evidence problem here. Looking at the second paragraph, all one has to do is replace the word “policy” with “economic” in the second sentence and it is an appropriate description of the economic environment today. The economy is still in the process of recovering from the ill effects of a financial crisis that is responsible for the worst business environment since the Great Depression.
The authors seem to recognize that economic factors are the driving force behind our slow recovery, so how can we plausibly determine the impact of public policy on the recovery in such a way that isolates the effects of different factors? The authors point to a December survey published by the National Federation of Independent Business, NFIB Small Business Economic Trends:
The weak economy is far and away the most prevalent reason given for why the next few months is “not a good time” to expand, but “political climate” is the next most frequently cited reason, well ahead of borrowing costs and financing availability. The authors of the NFIB December 2009 report on Small Business Economic Trends state: “the other major concern is the level of uncertainty being created by government, the usually [sic] source of uncertainty for the economy. The ‘turbulence’ created when Congress is in session is often debilitating, this year being one of the worst. . . . There is not much to look forward to here.”
Policy uncertainty is discussed in the second paragraph on Page 3 of the NFIB December 2009 Report. On Page 5, there is a summary table where survey respondents are asked whether or not it is a good time for expansion and the reason for their answers. Here’s what the report found:
– 54% of respondents stated that it was not a good time for expansion due to the economic environment
– 8% of respondents stated that it was not a good time for expansion due to the political climate
Technically, the political climate is the 2nd most frequently cited reason behind slow business expansion; however, that 8% of small business owners responding to a survey look at the political climate as a factor affecting their own businesses does not necessarily translate into public policy hampering a broader macroeconomic recovery. I won’t dismiss the possibility that the administration’s policies, at some point in the future (or even near future), could hinder recovery, but at this point, it’s still the economy, stupids.