A Persuasive Republican Narrative Hinders Economic Recovery

Excessive regulation has been called the reason the private sector isn't creating jobs, but that is a political slogan and it doesn't square up with the evidence.
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The best policy depends on the context, not the ideology, yet there is a fundamental disagreement over what is holding our economy back from a full recovery.
  • The 'Uncertainty' argument states that uncertainty is the reason that businesses are not investing. This is generally a Republican argument rooted in supply-side economic ideology.
  • The 'Lack of Demand' argument states that private consumers don't have enough money to buy goods and therefore stimulate the economy naturally. This is generally a Democrat argument rooted in real world analysis and example.

The uncertainty argument sounds good and is prevalent in American politics and business, not necessarily because it is true, but because Fox News pundits have used this narrative as a way to attack Obama. If an argument can be made, right or wrong, that Obama's policies are creating an atmosphere of uncertainty and therefore hindering economic growth, it hurts Obama's re-election prospects. However, this is political and not grounded in evidence.

Obama's record has been very business friendly. He hired Larry Summers and Timothy Geithner, two Wall Street favorites, to join him at the start of his administration. Nearly 1/3 of the $787 billion ARRA (the stimulus) was in tax cuts. The LA Times noted that "Obama's jobs council... called for overhauling the corporate tax structure and reforming federal regulations. Corporate tax rates should sink to "internationally competitive levels," the report recommended, and an "all-in strategy" should be adopted to cut reliance on foreign fuels by expanding domestic drilling." All of this is business friendly.

So this notion that businesses are concerned about tax increases on business because of greater public debt and regulation hindering growth and opportunity is a carefully crafted Republican narrative that has taken hold in the minds of business leaders.

Excessive regulation has been called the reason the private sector isn't creating jobs, but that is a political slogan and it doesn't square up with the evidence. A recent survey by small business economists found that regulation wasn't why businesses weren't investing; it was confidence. The report stated: 80 percent of survey respondents felt that the current regulatory environment was "good" for American businesses and the overall economy. Much to the annoyance of many of his core supporters, Obama's policies have been very pro-business. Opponents of Obama's economic policies chant that public investment "crowds out" private investment.

Uncertainty/supply-side proponents are missing a major lesson of Macroeconomics 101: public investment doesn't crowd out private investment in the short run; it does so in the long run.

A Misdiagnosed Economic Disease

Unfortunately, this 'uncertainty/supply-side' narrative is a misdiagnosis of what is really going on. This argument is fundamentally a conservative argument because it says that if you supply goods and services, people will purchase them. This is simplistic and, in this context and current economy, it is just wrong.

Businesses say that uncertainty is what is holding them back because they have bought into the Republican narrative on this issue. Both of my parents are small business owners (Attleboro, MA and Plainville, MA) so, in addition to having studied this issue at the highest level, I am intimately familiar the challenges associated with growing a small business. If either of my parents were in the black, they would either 1) keep that money as profit, or 2) invest it to grow their business if they thought people would buy their goods.

The private sector is sitting on over $2 trillion in cash reserves. If businesses expected that it would make money by investing this, businesses would invest. However, there is no guarantee that investing this money, a supply-side argument, is going to give a return on investment. The reason is that there is no sufficient demand. Citizens don't have enough money to buy goods. They are either out of work or their bills are too high, as is the case with students who owe enormous amounts on students loans (I personally owe $150,000 in student loan debt.)

Since the private sector isn't investing because they don't think there will be buyers because unemployment is high, someone needs to step in and decrease the unemployment rate, which will put money in the pockets of consumers. This will then increase business that investment will produce a return.

In all fairness, does regulation impede business? It can, but at present it is to a lesser degree than is claimed by Republicans; it is not the core or fundamental issue -- unemployment is.

When people have jobs, they will spend their money. When people are spending their money, businesses can grow. Am I arguing for more regulation and more taxes, both of which can hinder economic growth if done incorrectly? No.

The whole Republican argument blames the economy on a president's policies creating uncertainty and completely ignores that any uncertainty is coming from unemployment and consequently a lack of demand. Businesses would have more confidence if they felt that people would buy their goods. When the unemployment rate goes down, businesses will start to have more confidence. When businesses step in and invest, the government can back off and collect the revenues from that investment to pay down initial debt incurred to get us out of this slump or stalemate.

My Point

My point here is that it is easy to misdiagnose a crisis especially when the narrative is simple, easy to pallet, and politically hyper-charged. But a more nuanced look at a national economy and macroeconomics is imperative. If we misdiagnose a crisis we're unlikely to recommend the right course (policy) of action.

The private sector is sitting on over $2 trillion because it doesn't think people will buy their goods or services. Sustained unemployment decreases confidence that businesses will be profitable if they supply goods and services -- no one will be able to buy goods an services if they don't have a money to spend and so on. Someone needs to break this stalemate. That someone, as of recent, has been the government. In this economy, to stimulate demand and therefore the purchase of goods and services (which will grow an economy), people need jobs. Investment in infrastructure, education, technology, and research are critically important, at the state level and the national level to decrease unemployment and consequently increase business confidence that someone will buy their goods and services.

Paul Heroux is a master's graduate of the London School of Economics and a master's graduate of the Harvard School of Government. Paul has written extensively on macroeconomic policy and is a consultant in private practice on program cost-benefit analyses. Paul can be reached at paulheroux.mpa@gmail.com.

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