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Jul 16, 2010

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Allan R. Bevere

Michael,

Could you your perspective on this in relationship to the extension of unemployment benefits?

Travis Greene

Well, that's just terrifying.

Michael W. Kruse

As this suggests, there is something well beyond the normal churn of the economy at work. I think extension of unemployment benefits is a just response.

My major critique lies in another direction:

Q: What would solve this problem?

A: More jobs.

Q: Who creates jobs?

A: Businesses.

Q: Why aren't businesses creating more jobs?

A: Partly because they are anxious about what the government is going to do in the business sector and are therefore unwilling to take the risk of expansion.

Q: What does the government need to do?

A: Create a predictable business environment where businesses can have confidence about making costly investments that end up employing people.

Things like the health care bill, energy taxes, some regulation changes, increased taxes, etc., all work against the emergence of this environment.

You can't be pro-labor without also being pro-business and I don't think this administration has figured that out.

vanskaamper

Politely stated, Michael.

I think there's a confluence of factors. One is that benefits keep getting extended, and some on unemployment don't get serious about job-seeking until they're faced with the reality of being cut off.

Another is the severity of this recession.

Then, as you point out, the federal government can respond by either creating an environment with is pro-growth (by lightening tax and regulatory loads, for example), or they can do the opposite...and they can also do the opposite in a way that's perceived as capricious, which adds to the uncertainty.

JMorrow

Interesting chart and comments. One thing I am struck by is the dichotomy setup between being "Pro-labor" and "Pro-business". For example, regulation policy while curtailing what businesses can do, also prevent the kind of abuse and greed that brought on part of this economic downturn in the first place. So does regulation have to be an either/or policy tool? I think it makes more sense to talk about regulation in light of particular industries, not simply broad brushed. Do we simply trust that businesses across ALL sectors have learned their lesson in regards to overreach or excessive risk, or do we in the parlance of Reagan, "Trust but verify"?

Michael W. Kruse

Yes. As I noted, SOME regulations.

Generally speaking, if businesses behave too irresponsibly they will pay a price in the market place (Sell me an iphone that drops calls and I may switch to Android). However, with things like the financial markets or oil drilling platforms, the potential damage they can inflict is so great that there needs to be pre-emptive regulatory measures. Of course, another question is whether some regulations were sufficient but enforcers were inadequate.

I'm more concerned with regulation that tries to pick winners and losers (subsidies for agra-business, subsidies for biofuels) or tries to control prices (rent control or government setting costs for medical treatments).

In very general terms, referee the economy? Yes. Manage the economy? No.

Travis Greene

Do you really think that's the main thing businesses are concerned about? They aren't creating more jobs because nobody is buying anything. Everybody is hunkering down. Concern about government is probably way down the list.

vanskaamper

Re: concerns about government policy:

http://tinyurl.com/2au22kx

Travis Greene

vanskaamper,

Fine, but their suggestions are 1) tax cuts, which would be incredibly irresponsible at this juncture, and 2) expand infrastructure, which is incompatible with suggestion 1.

I certainly believe in both raising taxes and cutting spending. Democrats are frequently unrealistic about the necessity of the latter. But Republicans are ideological to the point of insanity on the issue of taxes. They stopped being the party of fiscal responsibility long ago.

vanskaamper

Well, the point of that comment was just to point out that there is, in fact, widespread fear and uncertainty in the business community regarding government policy, and it's helping to keep unemployment high.

That said, I'm a supporter of tax cuts designed to create incentives for growth, increasing taxable activity, and increasing the size of the tax base.

Michael W. Kruse

Travis, the issue I'm getting at is what public policy approaches might be taken. Yes, I do think uncertainty about the business environment his high on the list.

You are right that purchasing is way down. So how do you revive an economy? You give people incentives to buy more are you make it possible for businesses to produce with relatively less cost.

I think there are compassionate reasons for giving unemployment payments to people out of work but that isn't going to stimulate the economy. In fact, I think a great many will either save the money or use it to pay down debt, neither of which stimulates business.

If you make it more profitable and favorable for businesses to produce they begin to compete for customers, lowering costs. Goods become more affordable and that draws in more buyers. That creates more demand which means more production and so on.

In times of economic downturn I think it is sound policy to lower taxes to unusually low levels and be judicious about regulatory expansion. It certainly is not the moment to radically expand entitlement programs. That sucks capital out of the economy in to non-productive uses.

I know from small the small business world that when small businesses owners hit hard times the first intuitive cut they want to make is in advertising. Advertising is probably the thing you most need to increase now for the not to distant pay off.

Similarly while it seems like raising taxes to balance the deficit in a downturn may seem intuitive thing to do, I think you actually need to cut taxes, keep more money in the economy, temporarily increasing the deficit, and then raising taxes once growth is reestablished.

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