Unpredictable Government and Economic Growth

Gary Wolfram
 
Issue CCLVIII - August 28, 2010
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Robert Higgs of the Independent Institute has written extensively about the effect of what he has termed "regime uncertainty" on economic activity. His earliest paper on the topic, written in 1997 and later included in his 2006 book, Depression, War, and Cold War, explains how the Roosevelt Administration policies of the New Deal deepened and prolonged the Great Depression.

By offering a stream of legislation that altered property rights, redefined labor relations, and imposed regulations on business activity, Roosevelt created an atmosphere of uncertainty that froze private investment and stymied the incentive to hire people.

Polling data at the time showed that business executives were entirely uncertain as to what the federal government might do next, to the point that a socialist regime was a possibility. This, Higgs demonstrates, was a major factor in hampering economic growth.

Today we are faced with the same situation, perhaps worse.

The Obama Administration, along with House Speaker Pelosi and Senate Majority Leader Reid, has created enormous uncertainty for entrepreneurs and business owners. Suppose you are the owner of the Oasis Car Wash, with five car washes throughout Michigan and 65 employees, and you are deciding whether or not to add three new employees.

Think of all the uncertainty that the federal government has laid before you. First, there is the matter of the 2,000-page health care legislation. Until March of this year, you would not know whether the bill was going to pass or how it would affect the cost of hiring employees. Even now that the bill has passed you don't know what type of insurance will satisfy the requirement that you provide health insurance for your employees. It is possible that you would be better off paying the fine and not providing any insurance to your employees, but you won't know that for perhaps years, since some of the provisions of the bill don't come into effect until 2014.

Next is the massive uncertainty caused by the 2,300-page financial regulation legislation. Again, you didn't know whether the bill was going to pass until this past month. Now that it has passed, you will still not have a good idea how the legislation is going to affect your ability to get financing. Dozens of commissions and massive amounts of regulation will have to be fleshed out, and the compliance officer of your local bank will have to make decisions about whether these regulations will increase the cost of providing financing to your small business.

Your electricity costs will be indeterminate as cap-and-trade legislation looms ominously over the landscape. Will there be a tax on electricity generated from the Detroit Edison coal-fired power plants that will increase your electricity bill for heating the water in your car washes? How much will the tax be, and how much will be passed on to you?

What will be happening to the Bush tax cuts? Will they be extended, or will they be allowed to expire come January? Will some of the cuts be extended while others are eliminated? This will affect your net income and the net income of your customers, and you have little way of knowing what the situation will be.

These are just the major uncertainties of which we are aware. Given that the Obama administration and the Congressional Democrats clearly do not believe that their power is limited, who knows what new legislation may be hurtling down the pike at you. If you look at Bureau of Labor Statistics data, you will see that there is a very large increase in part-time employment during the Obama administration, and unemployment remains very high. From 1981 until the Obama Administration, part-time employment for economic reasons had not exceeded 6.8 million. Part-time employment for economic reasons was 4.78 million in January of 2008, and peaked at 9.24 million in October of 2009. It remains at 8.53 million.

This goes a long way in explaining why despite GDP growth of 5.0 percent in the last quarter of 2009, and 3.7 percent and 2.4 percent in the first two quarters of 2010, unemployment remains at 9.5 percent. Employers faced with a federal government that is unpredictable will respond to increased economic activity by hiring part-time work rather than taking on the uncertain costs of full-time employees.

The Founders were well aware of the negative effects of a federal government that is not bound by general principles. The time has come for our citizens to demand that the federal government be limited to those powers delegated to it by the states and the people.

This post originally appeared in The Michigan View (http://themichiganview.com) on August 13, 2010.


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