Economic Reality vs. fantasy

Haven't got much time this morning. Gotta be at work in a few minutes. Nonetheless, there are some thoughts I'd like to lay down before events have me moving on to other subjects and other considerations.

A fair amount of recent debate in the economics blogs (Brad deLong, Paul Krugman & others) centers around the effect that "regulatory uncertainty" is having on job creation. I don't have time to cite sources of offer links, however, the long and the short of it is that right-wing economists and trade associations have spent the last few years arguing against the notion that current economic woes are caused by a lack of consumer demand. For these guys, economic troubles are always the result of pressures on supply. Now, this is a ridiculous argument to make in these economic times, when we're living a terrible recession caused by the sudden disinflation of the mortagage bubble and the concommitant loss of trillions of dollars of consumer wealth that it occasioned. As Krugman and deLong (and other "Keynesian" oriented economists) point out, consumers who once spent profligately thanks to growing principle balances in their homes, suddenly found themselves "under water" on their mortgages, owing more on their properties than the properties themselves were worth. As a result they cut back on their spending and focused their economic efforts on paying down their debts (to the extent they were able). Suddenly businesses that depended on the American consumer for their profits saw sales dry up and profits vanish. Panicked, they cut back on production and fired workers.

The right-wing economist, however, tells a wholly different story. For him the problem isn't a lack of demand. For him the underlying problem is "regulatory uncertainty." Businesses would love to hire new workers and get the economy rolling, it's just that with a radical-Marxist in the whitehouse threatening massive burdensome regulation of private industry, they dare not hire workers who might come to cost them too much in the future.

Of course, this story is nonsense, but "regulatory uncertainty" has the benefit of being an ineffable quantity that one can summon when all other arguments fail to pan out. It basically equates to saying "because there's a Democrat in the White House." It is an argument that takes its own assumptions as conclusions.

Perhaps the quickest way to show this is to look at the evidence. While I don't have time to show it, at the moment, a look at the data clearly shows the economy falling off a cliff in the run up to the American Recovery and Reinvestment Act, then stabilizing afterwards. Hiring, which was plunging, picked up, though not at levels that would make a significant dent in our much higher unemployment figures, Nonetheless, a graph of the trajectory of hiring clearly shows a reversal in what was a terryfying trend (recall that from late 2008 to early 2009 businesses were cutting jobs by hundreds of thousands of workers a month. Comapred to those figures, a lackluster 30,000 new private sector jobs in a month looks like a veritable hiring boom.)

That the stimulus didn't return the economy to the place it was before the crash is indisputable, and the fact that conservatives use arguments along those lines to show that the stimulus "failed" shows the poverty of their reasoning. The stimulus did not acheive massive economic growth and reemployment, in part because it was too small, and because of politicl realities. Nearly one third of the package was made up of tax cuts, which are a poor way of providing stimulus to the economy. Roughly one third consisted of aid to the states, which merely replaced money they were cutting from their own budgets (and thus, added no net new money to the economy). And the last third (roughly $250 billion) was spent over a period of two years. SO, in essence, the money the U.S. spent over two years stimulating its own economy roughly equalled the sum we spent in one year supporting the occupation of Iraq at the height of that conflict's development.

So what about the uncertainty argument? Well, this argument has the virtue of being somewhat testable. If businesses were leery of hiring workers when Obama was the leader of a party that held hte congress and had a fillibuster proof majority in the Senate, then surely the loss of the Congress and the loss of the 60 vote majority in the Senate would have restored business confidence. After all, the actions of the GOP majoriyt in Congress and the minority in the Senate have made it clear that Obama will notbe able to pass major regulatory lesgislation. Regulatory uncertainty is a thing of the past.

So business is booming now, right? Well... not quite. In fact, we're about as close to falling back into recession as we have ever been, in no part due to the fact that the last of the Obama stimulus funds are being spent, and there is little prospect of a meaningful second round. In other words: orders have dried up. Demand is falling off a cliff again, and the economy is once again teetering on the edge.

(This analysis, of course, leaves off the looming european catastrophe, but that's. a story for another day)