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  • Poor Sales or Economic Uncertainty Preventing Stronger Recovery?

    Various organizations and media outlets have attempted to refute the notion that government policy is creating uncertainty and hindering economic growth. However, when properly analyzed, the uncertainty argument is a legitimate one.

    Critics of the uncertainty narrative say that businesses cite poor sales – or lack of demand – not taxes or regulations, as the biggest hindrance to growth. A recent blog argued that the National Federation of Independent Business (NFIB)—the leading small business association—cited that over the past three years, a plurality of its members – 30 percent – say poor sales are the single most important problem.

    Likewise, the Economic Policy Institute cited this same survey as a reason to reject the idea that uncertainty is holding back economic growth. They instead maintain that “slack demand appears to be the key concern of small businesses.”

    Saying that poor sales are the single most important problem affecting businesses is like saying that it’s cold outside because it’s 30 degrees. It’s a meaningless statement. It doesn’t tell us why it’s 30 degrees. What’s causing the “slack demand” that’s keeping growth weak?

    There are two reasons. The first is the nature of the financial crisis. The second is indeed economic uncertainty created by bad public policy, which the aforementioned arguments feebly attempted to discredit.

    Financial crises are unique. Economists Kenneth Rogoff and Carmen Reinhardt have shown using historical data from around the world that countries that experience financial crises tend to recover slowly. But public policy also surely affects growth. It can either complement or impede natural growth of the private economy.

    NFIB data suggest that policy is impeding growth. After pointing to poor sales as the primary problem, NFIB cites taxes and regulation as the second and third most serious problems, at 20.8 percent and 13.9 percent, respectively. In fact, businesses cite taxes and regulation combined as a bigger problem than poor sales (34.7 percent to 30 percent). And government has direct control over taxes and regulations. This means that government has the ability to control what 34.7 percent of businesses cite as problematic, and likely more since taxes and regulations impact demand.

    Yes, historically businesses have cited taxes and regulations as problems. Critics mention this phenomenon as reason to refute the current uncertainty rationale: If taxes and regulations have long been problems, how can they be responsible for creating uncertainty now?

    This is a fallacy. Bad policy is bad policy, no matter how long it’s been in existence. During good times, bad policies may be latent. People pay less attention to public policy when they are employed. During bad times, people pay more attention to public policy as they search for employment. Bad policies like taxes and regulations are thus magnified and exposed as the impediment to economic growth that they really are. That is what is happening now.

    Criticism of the uncertainty narrative rests upon the belief that the economy isn’t growing due to depressed aggregate demand. Yet that only raises the question of what’s causing depressed aggregate demand. Business survey data together with logic and common sense demonstrate that uncertainty is at least partly responsible for our slower-than-optimal recovery.

    Posted in Ongoing Priorities [slideshow_deploy]

    6 Responses to Poor Sales or Economic Uncertainty Preventing Stronger Recovery?

    1. Randall Hoven says:

      The easier rebuttal seems to come from data on consuming and investing. Consumption spending as recovered from the recession and is back about pre-recession levels. But private investment is still well below the pre-recession peak. I'm not sure how to square "poor sales" with all-time highs in consumption spending. The problem is lack of investment. (I see poor housing sales as the same thing: people afraid to make long-term financial commitments.) Uncertainty would seem be a major reason for that.

    2. Tanya says:

      taxes and regulations as problems, is an understatement when it comes to small business. In today's market it is the small business that is suffering, not able to plead to the higher ups for a bail out, but having bank accounts frozen if city, state & federal taxes are not paid on time. if there are any bail outs left those of us trying to do the right thing and support our middle america families could sure use a leg up.

    3. hitthedeck says:

      A nation of Salespeople and retailers:

      What happened to the American products and what happened to the people that were making them? Everything on the shelves has a made in china tag or some other countries name on it. Even the produce in the supermarkets are coming from South America. Our job market was traded off to foreign cheap labor and we can not compete with other countries that have a low cost of living. No wonder the traders on Wall Street are reaping in such high profits. They have become the middlemen of foreign trade and find no profit in American goods. These changes came in with lighting speed and without gradual change for adjustment of the economy and the job market went into a state of limbo. We first seen the explosion of small business people spring up on the internet with cheap foreign products that were convenient online purchases and profitable. The larger internet online companies moved in like A Wall Mart store in a small town to take the bulk of the market. The mega sales corporations sell individual products with a low mark up on profit but take the bulk of the profit on accumulated sales of products.

      • hitthedeck says:

        Obama’s fetish on alternate energy has also backfired because China beat everyone to the punch and out priced and bankrupted America solar companies before their products got out the front door.
        We might wake up to the fact that if you have nothing to sell you had better get in Obama’s entitlement line and live off the last of the pioneers that still hold a real job. The alternate energy scam is destroying hundreds of thousands of jobs. A good example is the move congress made to ban the conventional light bulb which in turn transferred a billion dollar business to china because Obama’s good buddy General Electric’s CEO Inhofe can not compete with cheap Chinese labor. General Electric and Sylvania are closing down plants nation wide with the loose of thousands of jobs. You can believe that Immelt will be the middle man for China’s light bulb market. That bright idea is just another reason why our nation is being sold out by our so called public servants. The fools protesting on Wall Street are too stupid to go after the criminals in Washington that is causing the destruction of this country. The Sheepherder in charge has blamed the wealthy Wolfs for the problems and the sheep believe their master!

    4. Tim says:


      The first part of your post makes a lot of sense. Your Rogoff-Reinhart evidence hits the nail on the head: financial crises exacerbate recessions in both magnitude and timeframe.

      But your rebuttal to the Economic Policy Institute’s Lawrence Mishel’s isn’t very persuasive. The argument against the claim that taxes and regulations aren’t the main culprit for impeding growth now is that it’s non-unique: historically, businesses have complained about taxes and regulations as impediments to growth, but those complaints don’t fluctuate with the business cycle. But complaints about poor sales do. For example, 40% of small businesses taking the NFIB survey reported that taxes and regulations combined were the single most important problem during President Reagan’s second term, up from 26% under President Carter. If you’re arguing that taxes and regulations are the primary impediments to economic growth, then by extension you are arguing that President Reagan, who increased “uncertainty” by 14%, was an utter failure on the economic front. So following your logic, if President Obama really wants to be successful what he really needs to do is make another 5% of businesses complain about taxes and regulations. Maybe President Obama should change is campaign slogan to, “Morning in America.”

    5. Deborah Read says:

      Consumption spending isn't up to pre-recession levels because people are out spending as before. It's up because everything costs more due to inflation. Prices for goods are either considerably higher, or the good has been shrunk to 2/3 it's pre-recession size causing consumers to purchase it more often. That creates a very different picture than portrayed by this Administration.

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