John B. Taylor and Lee Ohanian write,
why is the current recovery so weak? It is not because of the aftermath of the 2007-08 financial crisis. U.S. Financial markets began to recover in late 2008, more than four and a half years ago.
I am just starting to write in my book about the aftermath of the financial crisis (which means I am on the home stretch, although I am not sure that I might not try one more major re-write of the whole book). Like Ohanian and Taylor, I find it striking that he employment/population ratio today is actually lower than it was during the official “recession.” (See also Stephen Bronars on a careful calculation that adjusts the employment/population ratio for demographic trend factors. Bottom line: it still looks awful.)
My take on that is that the NBER dating of the end of the recession is a distortion of reality. Yes, GDP started to rise in the middle of 2009, but otherwise, things do not look very good.
Why is the economy not doing well? I would suggest the the latest Economic Freedom indexes might have part of the answer. Since the year 2000, we have fallen on a 10-point scale from 8.65 to 7.74.
The left’s counter-narrative is that the financial crisis blew a deep hole in the economy, and we needed bailouts and Keynesian stimulus do dig us out. We had about the right amount of bailouts, but not enough stimulus. And anyone who believes anything different is anti-science and defiant of the facts.
ObamaCare and other sweeping bureaucratic initiatives have imposed new costs on business. There is a story every few weeks of more control over companies. For example, the end of coal-fired energy production because of irrationally strict emissions controls. A businessman cannot now assume that reason will limit bad public policy.
Plus, it is not merely what is imposed now, but the demonstration by the government that it is willing and able to do new, unanticipated things. Local governments have demonstrated the reckless tendency to pass new taxes and systems of fines to squeeze revenue out of businesses and the population. Bloomberg and his soda-cup regulations impose costs with no reasonable benefits. What else will be imposed?
A booming economy means employing and making a profit using people who do not have high productivity. This is exactly the low-margin business most easily destroyed by government edict. Every investment is at risk, so why risk the investment unless you are politically connected?
EasyOpinions
A booming economy means employing and making a profit using people who do not have high productivity. This is exactly the low-margin business most easily destroyed by government edict.
This is profound.
I agree with you. The economic freedom index notwithstanding, economic freedom is probably a tricky thing to quantify, and an even harder thing for the average lay-voter to appreciate. I am a businessman not an academic, and I have seen increased regulations, albeit most of these are individually tiny. In the aggregate though, they are significant. For example, I work for a firm that assists gov’t agencies and private developers with the process of real estate entitlements and permits. I find the increased complexity and uncertainty associated with this process to be significant during the past decade, and this is on top of a pre-existing set of already complex rules, regulations and processes. If I described some of the events that occur in this process to a layperson, I think they would be surprised by the inefficiencies and costs involved. Before I worked in this profession, I was a banker who focused on the healthcare sector, and there to the regulatory imposed inefficiencies were massive as well. I assume that they are increasingly so these days in this sector. Obamacare is a very complex piece of litigation, much of which is effectively being written by the regulatory agencies charged with its implementation. Thus, it will be difficult to quantify the net fiscal effects of this law. But…..I assume that it will likely be negative, and the current uncertainties of this law are, I believe, already negatively effecting GDP.
On this note, I think one of the underappreciated growth killers of reduced economic freedom is uncertainty. Whether you are building a project, hiring employees or engaged in other economic endeavors, the cost imposed in the form of uncertainty can be very high. Obamacare is a good example of this. I would guess that most employers do not have a clear idea of how this legislation will affect them in, say, 3 years in the future. Nevertheless, they will adjust their hiring today in anticipation of possible negative consequences.
In the bigger picture, I think one of the issues is that the individual layperson does not have the time or inclination to involve themselves in understanding the inefficiencies that their left-leaning voting tendencies create at the voting booth and, by extension, within government bureaucracies. Consequently we have been moving along a “slippery slope” towards less economic freedom.
So add to Higg’s concept of “regime uncertainty” the idea that the uncertainty can be resolved as “regime worsening” and there you are….