The certainty myth

The recent fight over the debt ceiling has featured a lot of talk about “certainty”.  Specifically, how a lack of certainty about government regulation and the perceived excess spending by the federal government.

This has been a favorite line of conservatives to explain the economy’s weak performance.  How can companies grow with health care reform ramping up and Dodd-Frank waiting to get implemented and the Obama Administration advocating expiration of some of the Bush tax cuts?

And — if you don’t really think about it too deeply — it all sounds perfectly logical.  But, in fact, it’s not how business really operates.  Sure — all other things being equal — a stable regulatory environment is better for business than not.

But when in American history have businesses been assured of stability?  Business is not, nor has it ever been stable or predictable.  And it should never be.

Besides, we know that the real uncertainty that is causing businesses not to hire and not to expand is uncertainty of demand — not of government regulation.  Consumers have retrenched since the 2008 housing crisis and subsequent recession — doubling their personal savings.

When you have an economy that is 70% driven by consumer demand, a 2-3% reduction in spending is significant.  In fact, we see that the economy is still about $1 trillion in demand behind pre-recession levels, and some economists peg the total lost demand since 2008 at nearly $6 trillion.  You see now why a $800 billion stimulus package didn’t make everything sunshine-and-roses — it was far too small to turn the economy around on its own.

At a time when we’re fighting three wars and are still recovering from the worst recession in 70 years — one that was largely caused by bad actors in our corporate community — it’s foolish to be a business and assume stability and even more foolish to be a citizen or a legislator and take steps to immunize business from the aftereffects of problems that they helped to create.

The Clean Air Act and Clean Water Act — instituted in its modern form by Republican Richard Nixon — were a response to corporate failures to be good citizens.  Sarbanes-Oxley, instituted in 2002 by Republican George W. Bush, was a response to numerous failures of corporations to live by the normal rules of the market.  These were bipartisan reforms designed to protect Americans from corporate malfeasance.

Today, such normal logic has been turned on its head.

The Dodd-Frank bill, a relatively mild response to the Wall Street meltdown that tanked the economy languished in Congress for nearly two years before being passed on essentially a party-line vote.  Banks that were “too big to fail” before are now bigger thanks to federal action that allowed them to vacuum up the other banks of similar size.

Modest consumer protections — such as the establishment of the Consumer Financial Protection Bureau — that would require such radical steps as simplifying mortgage disclosure forms so you don’t have to be an attorney to understand them, improving transparency of credit card agreements, and trying to provide deeper understanding to consumers of how credit scores work are attacked as “big government” trying to control your life.

The one surefire way to get this economy up and running again is to stop putting the needs of corporations and the wealthiest among us ahead of the needs of the larger population.  We need to stimulate demand among the working classes.  How do we do that?  Investment in education.  Investment in infrastructure.  Investment in health care.  Investment in new technology.

This is not the time for forced austerity.  We are never going to solve our current fiscal problems without growing this economy.

Now is the time for selected and targeted investment in those things that will drive growth in the future and protect the vulnerable in our society, while aggressively weeding out and cutting other programs.  We can’t allow special interests to go to the front of the line and cripple our economic recovery at the expense of the American people.

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2 Responses to “The certainty myth”

  1. So what you’re saying is consumer spending is down because saving is too high so the logical answer is Fed Gov take more out of the consumer’s pockets and spend it for them? And “forced austerity” is when the government spends less?

    • Consumers are retrenching because of a poor labor market, which leads businesses to retrench because there’s no demand for their products or services. In times like this, Democrats and Republicans (until now) have always agreed that government needs to help fill the gap, soften the landing for the economy and get things moving in the right direction. Ronald Reagan did it. But now, instead of what we truly need (which is more stimulus), we’re going down the austerity road. The U.K. is floundering under David Cameron’s austerity plan, and we’re not likely to do better.

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