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Poor Sales or Economic Uncertainty Preventing Stronger Recovery?

Posted By David Weinberger On October 13, 2011 @ 8:00 pm In Ongoing Priorities | Comments Disabled

Various organizations [1] and media outlets [2] 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 [2] 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 [1] 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 [3]. 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.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2011/10/13/poor-sales-or-economic-uncertainty-preventing-stronger-recovery/

URLs in this post:

[1] organizations: http://www.epi.org/publication/regulatory-uncertainty-phony-explanation/

[2] media outlets: http://www.ritholtz.com/blog/2011/10/attention-charlie-rose-a-question-for-tuesday/

[3] that countries that experience financial crises tend to recover slowly: http://iepecdg.com.br/Arquivos/Leiturassugeridas/0801_w13761.pdf

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