I agree with this observation in Paul Krugman’s latest column:
A boom in business investment would be really helpful right now. But it’s hard to see where such a boom would come from: industry is awash in excess capacity, and commercial rents are plunging in the face of a huge oversupply of office space.
Can exports come to the rescue? For a while, a falling U.S. trade deficit helped cushion the economic slump. But the deficit is widening again, in part because China and other surplus countries are refusing to let their currencies adjust.
So the odds are that any good economic news you hear in the near future will be a blip, not an indication that we’re on our way to sustained recovery.
The irony of the statement is that the very policies that Dr. Krugman advocates are materially responsible for the lack of business investment. The real world is not like the world of theoretical economics in certain basic ways. Specifically, managers must believe that they can show a profit from their actions over the period during which the actions must be sustained. Uncertainty is the enemy of that and it would take a bold manager, indeed, to undertake anything other than a short term investment in the present environment. A regulatory environment in which the regulators are determined to be “better and smarter” is deadly to robust economic expansion.
What should be done? Either enact the healthcare reform bill into law or dump it. Either enact the energy bill or kill it. Put your revised regulations into place and be prepared to leave them as-is for the foreseeable future.
Or be prepared for double digit unemployment and sluggish economic growth.
You’re right. Even though economic models these days can incorporate randomness they don’t include uncertainty at the policy level typically. And major shifts in policy can have very large, wide and long term impacts. This is why I think it was a mistake for the Dems to interpret their election results as they did, a mandate for sweeping policy changes.