Monday, July 12, 2010

Animal Spirits and Liberal Governance

Here’s a lucid statement of the center-right’s favorite explanation of our economic doldrums from Michael Barone (my emphasis):
“Consider the complaint of Verizon CEO Ivan Seidenberg, head of the Business Roundtable, which has been playing footsie with the Obama administration for most of the last 18 months. ‘By reaching into virtually every sector of economic life,’ Seidenberg recently wrote, ‘government is injecting uncertainty into the marketplace and making it harder to raise new capital and create new businesses.’

“Or take a look at Obama backer Nate Silver's fivethirtyeight.com website. ‘Why aren't businesses hiring?’ asks tax lawyer Hale ‘Bonddad’ Stewart. ‘Uncertainty: There has been a tremendous amount of change over the last 12 months. Businesses are still trying to figure out what this means for their bottom line. Until there are firm answers, they will freeze hiring.’

“[T]he Obama Democrats' vast expansion of the size and scope of government -- and the threat that they may pass even more such legislation in a lame duck session of Congress after the November election -- has chilled the animal spirits that John Maynard Keynes said were the driving force for economic growth.”
The justification of this view turns on the psychological difference between running calculable risks and coping with incalculable uncertainty. So long as prospective employers can estimate the relative likelihood of the alternative business scenarios flowing from their investment decisions, they can draw up business plans in which they have enough confidence to execute. But when they have to contend with too many variables, tolerable risks turns into enervating uncertainty. The extraordinary scope of Obama’s agenda—encompassing healthcare reform, financial reform, cap-and-trade, immigration reform and card-check—presents entrepreneurs with enough uncertainty to suppress the animal spirits that, under normal circumstances, would move them to create private sector jobs.

Although I'm agnostic about how much of our current economic situation is explained by these observations, their logic looks pretty sound to me. It makes sense that economic uncertainty tends to increase with the scope of a government’s regulatory agenda, and that, all other things being equal, the more government-created uncertainty there is, the less private hiring there will be. Set aside the obviously relevant consideration that the content of Obama’s agenda is designed precisely to keep other material things from being equal. It still follows that, however ambitious a president’s regulatory agenda may be, it pays him to minimize the avoidable uncertainty it generates.

Given the agenda that he has undertaken, how good a job is Obama doing in this respect? I don’t see how you can give him very high marks. It would be hard to come up with a decision-process that generated more uncertainty than the one that gave us Obamacare and the one that’s about to give us financial reform. Before the last year-and-one-half, it hadn’t occurred to me that a political decision-making process could be painfully slow and rash at the same time.

We argued for over a year about health care reform. But when the moment for decision finally arrived last March our representatives were obliged to vote up or down on a 2000-page draft without knowing exactly what was in it and without having devoted much systematic thought to what the material consequences of passing it would be. Nancy Pelosi wasn’t joking when she said we’d have to pass ObamaCare to figure out exactly what it is.

Substantially the same thing is happening with respect to financial reform. We’ve argued about it for the better part of 8 months, only to have crucial, but utterly unexamined, features of the legislation emerge from 4 a.m. meetings of House and Senate minds buzzing from their thirteenth cup of coffee and then be submitted for expedited up-or-down votes. In each case the decision-making process cast a shadow of uncertainty over commerce throughout its extended duration, without enabling prospective employers to figure out at the end, or near the end, what the final product held in store for them.

This is a great country, so I’m sure that, if we put our minds to it, we could come up with a more efficient way of generating uncertainty. But it wouldn’t be easy.  It would be unfair to blame Obama insofar as the uncertainty his agenda has generated is a function of systemic limits on presidential power. In our system, presidents who’ve failed to sustain impressive public support for their agenda lack the power to compel members of their own party to vote their way on crucial legislation.  That's not Obama's fault, although pressing ahead in the absence of public support may prove to be an unwise decision.

A lot of the uncertainty generated by Obama’s agenda, however, has resulted from his reticence to reveal his priorities early in a legislative process that dragged on interminably while congress filled in the blanks. And still more of it has resulted from Obama’s political decision to keep plugging issues like immigration reform and cap-and-trade to stoke up his base after it's become clear that they can only be passed, if at all, after the mid-terms by the lame duck congress on its way out the door.

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