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Commentary

No Job Growth Under “Regime Uncertainty”


     
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Friday’s depressing unemployment news that jobless rates rose in 44 U.S. states in July—“the most states to show a monthly increase in more than three years and a reflection of weak hiring nationwide”— underscores observations made by top CEOs in their latest “earnings calls”, teleconferences hosted by CEOs of publicly-held companies to discuss their quarterly earnings and current market trends. In reviewing the transcripts of 500 recent such calls, the Wall Street Journal found that a surprising number used them to “publicly vent” about woes in Washington:

“‘If you can’t plan, you can’t spend. And if you don’t spend you don’t hire,’ says one healthcare CEO. ‘It’s just hard to do budgets.’”

This phenomenon has been dubbed “Regime uncertainty” by Independent Institute Senior Fellow Robert Higgs, rooted in his research on the Great Depression. Noting that the U.S. economy started to recover in 1935, Dr. Higgs points out that it instead plunged firmly back into depression when a new wave of regulations were unleashed as the “Second New Deal”—where it remained until after the end of World War II.

Investors—those individuals who funnel resources to enterprises that create jobs—and business executives—those whose jobs depend on producing a return to investors—are not gamblers. If they cannot predict what the rules of the game will be, they will simply adopt a wait and see attitude. Effectively, they will choose to do nothing.

Even FDR’s Secretary of the Treasury, Henry Morgenthau, recognized the problem for what it was, and became so frustrated that in a 1937 cabinet meeting, he blurted out to his boss: “What business wants to know is: Are we headed toward Socialism or are we going to continue on a capitalist basis?” In his plea Morgenthau encapsulated the wide-ranging uncertainty that Lammont du Pont expressed in the same year, when he said:

“Uncertainty rules the tax situation, the labor situation, the monetary situation, and practically every legal condition under which industry must operate. Are taxes to go higher, lower or stay where they are? We don’t know. Is labor to be union or non-union? . . . Are we to have inflation or deflation, more government spending or less? . . . Are new restrictions to be placed on capital, new limits on profits? . . . It is impossible to even guess at the answers.”

As wave after wave of new taxes, regulations, subsidies, and expansive new government programs left investors and businessmen fearful and uncertain, net private investment in the decade of 1930-1940 was actually a negative $3.1 billion.

The length of the current recession is alarmingly reflective of this same fear and uncertainty, resulting from unprecedented regulatory activism by Washington on a bipartisan basis. In the aftermath of the 2007 financial meltdown, the Bush administration pushed through the most massive intervention in financial markets ever seen, with federal takeovers of Fannie Mae, Freddie Mac, and AIG, and the roll-out of TARP. Bailouts of some of the largest financial institutions, on a seemingly capricious basis (Goldman Sachs was saved while Lehman Brothers was allowed to fail), were followed by the automaker bailouts. As a result, by December 2008, the chairman and chief executive of the China Investment Corporation expressed a lack of confidence in Western financial institutions due to regime uncertainty, and said that his giant fund would make no new investments in them:

“Mr. Lou said that the sheer pace of new initiatives and new rules issued by Western regulatory agencies was disconcerting and made it even harder for him to choose worthwhile investments. ‘If it is changing every week, how can you expect me to have confidence?’ he asked.”

The years since have only compounded an environment of ever-changing rules, with President Obama building on the massively increased federal spending of the Bush years, and aggressive new and changing tax and regulatory policies. The nearly 2,000-page Affordable Care Act is perhaps the most controversial of these, with terms that leave so much to bureaucratic discretion that no one knows what the net effect will be. And, perhaps most pervasive to all American decision-makers, is the specter of the “fiscal cliff” of tax rates resetting at the end of this year.

All of this feeds an atmosphere of uncertainty under which businesses and investors hunker down rather than risk capital that would create additional jobs. And we’ve simultaneously entered a new era of “jobless entrepreneurship,” with new businesses increasingly consisting of sole proprietorships rather than firms employing others.

Washington has attempted to counter these trends with proven-ineffective economic policies: starting under Bush and continuing under Obama, the Fed has pursued round after round of “quantitative easing” supposed to alleviate a lack of liquidity in the economy and bring unemployment down.

In fact, American non-financial corporations hold more cash than they have for 50 years: $1.9 trillion, or 7% of all their assets, which is the highest level since 1963. The good news is that such resources, if deployed, could fuel a tremendous recovery in the private sector. But the future policy environment is simply too unpredictable for American CEOs to do so, and the current political divisiveness and campaign rhetoric aren’t doing anything to allay these fears. As the CEO of a public manufacturing firm put it, “People should be focusing on improving the economy instead of just bashing each other.”

The other highly-touted policy prescription has been stimulus spending, which despite a spectacular lack of results remains a perennial favorite as a result of popular mythology that has grown up around the Great Depression and World War II.

Because World War II saw an explosive growth in GDP and the elimination of unemployment, it has become popular to assert that the war was responsible for ending the Great Depression. It’s certainly true that American output exploded during the period, with millions of weapons, thousands of planes, and hundreds of ships cranked out and sent into battle, resulting in a huge increase in measured GDP. At the same time, 16 million Americans served in the military forces over the course of the war—10 million drafted and the balance enlisting—which naturally resulted in “unemployment” plummeting. But as the formerly unemployed were subsumed into below-market wage employment that could and did result in death and dismemberment, many of them might have preferred the alternative.

Meanwhile, on the home front, civilians saw none of the supposed increase in GDP, instead facing rationing in everything from food, fuel, and clothing, to the complete unavailability of products ranging from new tires through almost anything made of metal in a pre-plastics age, including automobiles or appliances, for the duration of the war.

This is hardly the picture of prosperity painted by those who continue to repeat the old saw that World War II “got us out of” the Great Depression.

Thus, as we dissect the statistics, we see that American businesses and consumers are responding to today’s regime uncertainty just as they did to that of the 1930s: saving rather than spending or investing, watching and waiting to see what next year will bring. And we can also see that massive spending by Washington actually resulted in a lower standard of living for the average American during World War II, just as it is doing today.

So what is the answer to today’s ills?

Looking again for parallels with the Great Depression, following the death of FDR, President Truman replaced the vast majority of his advisors and refused to listen when they warned that cutting government spending after the war would plunge the economy back into depression. Truman proceeded to cut federal spending by 60% in 1946—concurrent with the release of 10 million men from the military. Rather than the depression the Keynesians had predicted, civilian output that year increased by 30%—the highest in U.S. history. By 1948, real output was back on its long-run growth trend, and the Baby Boom was underway. As Dr. Higgs summarizes in “The Great Escape from the Great Depression,” with the change in Washington’s policies,

“Because ‘regime uncertainty,’ which had dominated the later 1930s, no longer cast such a dark shadow over business and investment, the economy finally recovered from the Great Depression and the economic hardships of the war years, even as it simultaneously reallocated about 40 percent of the labor force from war-related uses to civilian uses.”

Washington today thus needs similarly to reverse the past decade’s pattern of runaway federal spending and mounting debt—settling monetary, tax, and regulatory policies to predictable, reasonable levels that encourage investment in enterprises large and small. That truly would get America back to work.


Mary L. G. Theroux is Senior Vice President at The Independent Institute and Managing Director of Lightning Ventures. She is Chairman of the Advisory Board for the Alameda County Salvation Army; former Chairman of the San Francisco Salvation Army Advisory Board, and a Member of the National Advisory Board of The Salvation Army.






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