It’s the Policies, Stupid

Investor Clifford Asness, writing in the Wall Street Journal, critiques the “uncertainty” explanation for the slow growth in the economy and provides an alternative explanation:

Consider two uncertain situations. In the first, our business is waiting to find out the location decision for a customer’s new industrial plant, so we know where to build our new supply facility. Until this is resolved, we will not invest in building nor will we hire staff. In the second situation, we know we are in for some pain, someone is going to make our business less productive and profitable, but we do not yet know how much. Planning is marginally more difficult, but the main reason we will not grow in the second situation is that investment is less attractive regardless of the precise resolution of uncertainty.

In the first case, uncertainty is the obstacle. Once it is resolved, we invest. In the second case, uncertainty is a small part of the problem. The large part is simply that bad things are happening. The day we are told “well, it’s exactly a 30% hit to productivity and profits,” all uncertainty is resolved—yet we will still not invest or hire.

The immediate retort, I presume, will be to point to large corporate profits and substantial reserves being retained by some companies. Profits from booming sales overseas do little to spur hiring and spending here in the United States. Quite to the contrary, they’re more likely to encourage overseas investment which to a large degree is what we’ve seen over the last couple of years.