The Suspense is Killing Western Economies

It’s not a lack of stimulus or too much austerity that is holding the recovery back. It’s the uncertainty, stupid!

View of the Empire State Building in Manhattan from Queens, New York, September 1, 2010
View of the Empire State Building in Manhattan from Queens, New York, September 1, 2010 (Chris Goldberg)

With Europe on the brink and lackluster growth in America, the left and right have offered completely opposite analyses of what went wrong and what needs to be done now.

Austerity? You mean tax hikes

The left says the problem is austerity. Government spending has been cut too deeply, too fast. Public sector employment has declined. The result has been a drop in consumer demand, therefore growth is elusive.

This argument glosses over the fact that in few Western countries public spending has actually been cut.

Rather, governments have reduced the projected growth in spending, but this is hardly austerity.

To mend their deficits, most governments have raised taxes instead, which even most leftists, at least in the United States, recognize is detrimental to economic expansion.

It’s not surprising then that in the countries where taxes have been raised the most — Greece, Italy — the recovery has stalled or reversed.

Ignoring the supply side

The idea that demand should be propped up at a time of crisis ignores the other side of the equation: production, innovation, investment and trade.

Injecting money into the economy in an attempt to “stimulate” it hasn’t worked for the countries that tried it.

The United States borrowed nearly $800 billion to finance a massive stimulus that couldn’t prevent unemployment from rising to 10 percent.

The balance sheets of Western central banks have more than tripled in size since the start of the downturn to provide as much as $6 trillion in free money to sustain demand — but the result has been underwhelming.

Many banks still teeter on the brink of insolvency because they’ve never had the proper market incentive to shore up their balance sheets and remove the misallocations from the financial system that built up during the boom years.

Monetary expansion actually hinders this process, which is needed if we are to have a recovery in the real economy.

Uncertainty

What is preventing a recovery even more than the absence of supply-side policies and sound money is the lack of a defined policy at all.

It’s worst in the United States. President Barack Obama promises more public “investment” and higher taxes if he is reelected. His challenger, Mitt Romney, offers the opposite. Who knows what to expect after November?

In the meantime, small businesses must wait and see if the Supreme Court will strike down a health-care law or not that makes it nigh impossible for them to hire more than fifty workers lest they have to buy health insurance for every single one of them.

In France, a similar provision exists where labor laws don’t fully apply to companies with fewer than fifty workers. The result? France has some 1,500 companies with 48 employees and some 1,600 with 49 but only 660 with fifty and 500 with 51.

It gets worse. If Congress fails to act in December, taxes will automatically go up by nearly $400 billion.

If Obama is reelected by that time, he will likely try to double taxes on capital gains on top of it.

Sitting on their money

So it’s no surprise that businessowners and investors are delaying plans for expansion and sitting on their money in anticipation of what is to come.

Or better yet: put their money in “safe” Treasury bonds, thus denying the real economy the investments it needs.

The lack of a recovery isn’t due to spending cuts that never were nor in spite of stimulus measures that were ill advised in the first place. It’s the uncertainty that is stifling investment and job growth. Policymakers have only themselves to blame for that.

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