On the “Investment Climate” Argument


James Hanley

James Hanley is a two-bit college professor who'd rather be canoeing.

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14 Responses

  1. Avatar Simon K says:

    I don’t know much about Germany, but the UK has been conducting a much more aggressively expansionary monetary policy than the US. Inflation is running at well above its 2% target, averaging around 3%, where in the US the CPI is still below its mid-2008 peak. This is a much more likely explanation for their better growth prospects than this strange “poor investment climate” that has no symptoms other than precisely those you’d associate with monetary contraction following a financial crisis. If I were to guess I’d say that the current ECB policy, while its contractionary for Ireland, is expansionary for Germany since they had little or no impact from the financial crisis.

    The US national debt is only 98% of GDP, which for a developed country is quite moderate. Compare that with over 400% for the UK, or 167% for Greece and 1300% for Ireland, and170% for Germany. Not only that, but the markets show an unquenched apetite for US debt – interest rates are low and will be for the foreseeable future.

    So what reason is there to suppose that the US comparatively small debt will require the kind of substantial tax increases that would put off an investor within plausible investment time horizons? This is the key question that needs to be answered for anyone who doesn’t have a political motive to take this argument seriously.Report

    • Avatar James Hanley in reply to Simon K says:

      I think you’ve become too focused just on tax increases. That’s not the only policy that affects investment decisions. Look back to the New Deal era. The real questions are about increased spending–which as the U.S. has shown can be done without tax increases–and uncertain and irregularly changing regulatory policies.Report

      • Avatar Simon K in reply to James Hanley says:

        Okay, so expected taxes are not what’s leading to the “poor investment climate”, and neither (based on our previous conversation) is expected inflation. So how, other than these two things, does increases government spending lead to a “poor investment climate”?Report

        • Avatar James Hanley in reply to Simon K says:

          Did I agree that expected inflation doesn’t harm the investment climate? I know you argued that the interest rates aren’t showing it yet, but I’m not persuaded.Report

          • Avatar Simon K in reply to James Hanley says:

            Well, when I argue there was no sign of any inflation before, you said that wasn’t the main thing you were worried about. Now apparently taxes are not the main thing you’re worried about either. If you want to talk about inflation instead, that’s fine – under what plausible scenario can expected inflation reduce investment but not only not increase interest rates, but actually flatten the yield curve and push down the TIPS spread?

            Its one thing to be unpersuaded by market indicators – the bond market is usually wrong about inflation, after all – but its another thing entirely to make an argument that depends on the market doing two contradictory things at the same time.Report

            • Avatar James Hanley in reply to Simon K says:

              The main things I’m worried about is a continuing debt load that constrains our ability to fund things we really need and a succession of bad and rapidly changing policy responses to that.Report

              • Avatar Simon K in reply to James Hanley says:

                Can you explain what policy responses there are to constraints imposed by the debt load? At the moment, it doesn’t seem like the debt load imposes any constraints at all, because the US can basically borrow for free. Sorry to sound like a broken record, but if people were unwilling to lend to Uncle Sam, interest rates would be higher.Report

              • Avatar James Hanley in reply to Simon K says:

                Sorry to sound like a broken record myself, but I don’t think that willingness lasts if we don’t begin to reduce our debt load. And I don’t think anyone seriously disagrees with that. Your point seems to be that we shouldn’t worry because don’t see the symptoms yet, even though we all know the consequence of the actions. Were I going to be snarky (a subtle hint that I am in fact going to be, eh?) I’d ask if you feel comfortable smoking three packs a day just because you haven’t started coughing yet. More seriously, the U.S. is still seen as a good place to loan to because we have a perfect record of repayment. The moment people begin to get doubtful about our repayment ability, they’re going to start to back out. Higher interest rates would be the sign that they’re starting to. Does it really make any sense to wait until the problem occurs before taking action?Report

              • Avatar Simon K in reply to James Hanley says:

                I agree with that, because you’re saying something different now! It obviously makes sense for the US to have a plan to reduce its deficit once the economy recovers. This is a very different thing from arguing that the deficit is preventing recovery, because of some effect “investment climate” that you haven’t yet clearly described.Report

  2. Avatar gregiank says:

    Clearly having universal health care makes economic growth impossible.Report

  3. Avatar D. C. Sessions says:

    Late to the party, alas.

    However, I propose to y’all that in the spirit of Occam’s Razor one should not attribute to “investment climate” and other Rorschach issues what is adequately explained by lack of demand. American companies are rolling in money — they have record high cash balances — and yet aren’t investing in expansion. “Why?” one might wonder indeed — and the simplest answer is that they’re already operating well under capital capacity [1] and capital capacity expansion would be plain stupid until demand picks up.

    Germany, in contrast, is doing nicely with an export-driven economy. They’re also operating at less than capital capacity, but by various means (including Government subsidy of part-time work) they’ve kept people employed so that when demand increases they’ll ramp up faster than US companies will.

    It’s also worth noting that it’s one thing to “commit” to reductions in spending and quite another to actually do so. Germany’s government spending/capacity ratio has increased over the past two year while the US has actually reduced it.

    [1] As distinct from labor capacity. After layoffs they’ve reduced that until it matches the current demand and are counting on ramping up workforce when demand picks up.Report