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You are here: Home / Uncategorized / Uncertainty – The Intangible that Rules the World: Politicians’ incessant meddling keeps economic recovery at bay

Uncertainty – The Intangible that Rules the World: Politicians’ incessant meddling keeps economic recovery at bay

November 1, 2010 By Nevada Business Magazine Leave a Comment

The most relevant economist of 2010 may well turn out to be Robert Lucas.

Lucas won a Nobel Prize in 1995 for pointing out how individuals’ changing expectations about the future can impact economic decision-making in the present. Expectations of higher taxes in the future, for instance, might encourage greater capital consumption today. Or such expectations might encourage business owners to move overseas, expatriating capital to nations that demonstrate a higher commitment to property rights.

Most macroeconomic models fail to adequately account for the impact of changing expectations on economic performance. This — among others — was one weakness of the models that were intended to justify the American Recovery and Reinvestment Act — the massive “stimulus” bill that was supposed to prevent nationwide unemployment from exceeding 8 percent. Clearly, President Obama’s economic team did not sufficiently consider that greater government involvement in the economy — through increased spending, taxation or monetary policy — would alter individuals’ perceptions about future conditions.

Yet, even as Washington has overseen the bailouts for Wall Street investment bankers, a massive infusion of “stimulus” spending and more than a doubling of the monetary base, government action has been unable to prod individuals into spending money or investing resources in new enterprises and job creation. As Fed member banks sit on more than $1 trillion in excess reserves, would-be entrepreneurs have shown themselves unwilling to assume the risk inherent in borrowing for new business ventures, and so unemployment figures remain high nationwide.

What has caused this stagnation?

In a word: uncertainty.

Over the past two years, prospective investors and entrepreneurs have seen rules changing at an alarming rate. Failed ventures have been bailed out with public funds, the value of the dollar continues to plummet and policymakers keep signaling that resources will be allocated based on political objectives, rather than in accordance with market fundamentals.

Potential entrepreneurs also face uncertain labor costs going forward. Healthcare “reform” bills passed by Congress in the past year will impose multiple financial penalties on employers and individuals alike. Employers are to be compelled to provide employees with health insurance that meets federal approval or pay a direct penalty. Sure, there will be a complicated array of temporary tax breaks for small businesses, but the onerous new accounting measures forced on all employers look likely to impose, in themselves, a huge, hidden financial burden.

To make matters worse, Congress’ attempt at healthcare “reform” — according to RAND Corporation findings — will lead to decreased access to healthcare by inducing overcrowding at hospitals. Even the Congressional Budget Office finds that health insurance costs will increase for those in the individual market and that 21 million Americans will still be uninsured after 10 years. This will occur even as millions of Americans are herded into the substandard medicine of the Medicaid program, shifting a large financial burden onto state governments.

Entrepreneurs also face extreme uncertainty with regard to the tax structure they’ll face. Americans could soon see their largest tax increase in history as federal income taxes, capital-gains taxes, taxes on dividends and estate taxes are all scheduled to rise dramatically in 2011. These tax increases will make access to capital more costly by discouraging investment in American corporations. Likewise, the return of the estate tax will inevitably lead to liquidation of small, family-owned businesses, putting their employees out of work.

Add to these woes Congress’ signaled intent to impose higher energy prices through a potential cap-and-trade bill and the specter of forced unionization through card check and it is no wonder that entrepreneurs aren’t leading America out of recession. Individuals weighing the long-term investments that would create jobs need to have some confidence regarding the future cost structure they will face. At every opportunity, Congress has actively sabotaged any possibility of that confidence.

The situation is similar in the states. Nevada lawmakers reflexively tout schemes to stick it to any would-be entrepreneurs with some new “broad-based business tax” — all while disingenuously claiming a desire to “diversify the economy” by attracting new corporate investment. Only two years after breaking the state’s previous tax-hike record, lawmakers and echoing bureaucrats have propagated a false narrative that Nevada faces a $3 billion hole in 2011. They’re laying the groundwork for even more punitive new taxes on small business.

It would be a wonder if we were not mired in recession.

Filed Under: Uncategorized

Paul Krakovitz: Intermountain Healthcare

Edward Vance: EV&A Architects

Scott Arkills: Silver State Schools Credit Union

Tonya Ruby: Cox Media Las Vegas

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