Politics & Policy

The Psychology of Recession

Obama and his team speak the language of redistribution and entitlements -- not the language of opportunity and prosperity. And Main Street is listening.

I asked a businessman two weeks ago why he said that he was neither hiring nor buying new equipment. He started in on “rising taxes.”

“But wait,” I interrupted. I pointed out that income-tax hikes haven’t taken effect. The old FICA income caps are also still applicable. Health-care surcharges haven’t hit us yet.

He countered with “regulations” and “bailouts.” I said, “Come on, get specific.” He offered up “cap and trade” and “the Chrysler creditors.” I parried with more demands that he tell me exactly how the federal government has suddenly curbed his profit margins, or how his electric bill had gone up since January 2009, or whether he had lost money on any investment because the government had violated a contract.

Exasperated, he talked now instead of more cosmic issues — the astronomical borrowing, the staggering national debt, and the new protectionism. I pressed again, “But aren’t interest rates historically low? Inflation is almost non-existent, isn’t it? New products are still comparatively cheap? Rents and new business property are at bargain-basement prices?”

This give-and-take went on for ten minutes; but you get the picture. Private enterprise is wary, hesitant, even frightened, but nevertheless hard pressed to demonstrate in concrete fashion how Obama has quite ruined them in just 18 months.

So why are a lot of cash-solvent financial firms, banks, and manufacturing companies not hiring, not expanding, and not buying new operating equipment as they did in past bottoming-out recessions?

In a word, fear. Remember that capitalism is in large part psychologically driven. Confidence, optimism, and a sense of calm about the future foster risk and investment, while worry, pessimism, and a sense of foreboding ensure timidity and stasis.

Barack Obama — who is mostly a creature of the university and the dependable government payroll — does not seem to grasp that fact. If one were to deconstruct any one speech, any particular piece of proposed legislation, or any single executive order, one might not necessarily conclude that Obama’s agenda bodes poorly for the creation of capital. But after 18 months, put the pieces together, and the once jumbled-up jigsaw puzzle starts to form a disturbingly coherent picture.

First, there are the appointees and their various public statements — again, insignificant in isolation, but telling in their totality. Why would any executive hire the self-avowed Communist gadfly Van Jones as his adviser for “green” jobs? Regulation is one thing, but an interior secretary promising a “boot on the neck” of a company is quite another. Why does a labor secretary reassure, gratuitously, illegal aliens that they are not really subject to lawful enforcement of the laws?

What is California agribusiness to make of the energy secretary’s prediction that Golden State farms will soon dry up and blow away? Is that a promise or a prediction? If the latter, is it lamented or welcomed?

Was not Mao the world’s most lethal Communist? Why then would a White House communications director see him as an inspirational figure?

NASA historically marries private enterprise and government purpose to study and explore space; why then would President Obama direct its head to put “foremost” the use of our resources to make Muslims feel good about their scientific past?

Why ram through on a recess appointment a new health-care czar who has repeatedly warned that good health care is synonymous with redistribution of resources and wealth?

Second, there is Obama’s own history, which suggests that his subordinates are competing in parroting the world view of the man at the top. On the campaign trail, Obama touched upon the need for “redistributive change,” a desire for “skyrocketing” energy prices, and the imperative of “spreading the wealth” in a fashion that sounded like a refined version of the Rev. Jeremiah Wright’s crude liberationist socialism. But the reversal of the payout to Chrysler creditors, the absorption of large insolvent private companies, and the promises for intrusive cap-and-trade energy legislation only seem to confirm that the president has no understanding of the historical role of entrepreneurship and businesses in creating the sort of wealth that he takes for granted can be redistributed. Obama, past and present, seems always to talk of how someone else’s money should be spent, dispersed, and redistributed, but never to worry about how it can be made in the first place.

So, fairly or not, when the president talks, business people do not gain confidence that he knows, or cares, much about them or what they do. If he thinks even surgeons are greedy profiteers, who then escapes presidential disdain?

Third, the real worry is not for 2010 — after all, few revolutionaries create their utopias in a mere 18 months — but for the years to come, for which business people must right now schedule purchases, hire, and in general gamble that their investments will pay off when the boom returns. Yet at one time or another some administration official has talked of new inheritance taxes, new FICA tax schedules, new income-tax rates, new health-care surcharges, or a possible VAT or federal excise tax — all at a time when state income and sales taxes are climbing.

It does not matter whether all or some of these proposals are merely trial balloons. They still have a depressing effect in reminding the productive classes that the government is going to take a much larger percentage of their rewards and spend it for purposes that might just make things worse still. That notion kills rather than spurs investment.

And climbing taxation is not the only reason why business is now worried about fiscal policy. There is also a depressing realization that any additional revenue will hardly balance the budget, given the astronomical spending. Do not underestimate the psychology of deficits. The owner of a tire store or a pool-cleaning company may not like handing over more hard-earned money to government, but he hates the notion that it is all in vain anyway — already pledged away as interest on the rising debt before it is collected.

Out-of-control government spending depresses small businesses in other ways beyond leaving them with less cash. Growing government entitlements and redistribution are seen as undermining personal initiative. The more we provide subsidies for housing, health, education, food, and entertainment, the more the individual seems to want more compensation for less work — and the more the employer feels he has been had, as he works while others do not.

Finally, business operates best under the assumption that the law is applied equally and that there are no insider cronies who are favored by government because of their contacts, cash, or politics. The problem with socialism as we see it practiced abroad is not just that it hates private business in general, but that it hates some private businesses far less than others. Crony capitalism is the statist habit of farming out government concessions to friends and fellow travelers who spout the same revolutionary slogans, or who promise bribes or jobs to their particular government overseers. We would have more readily believed Barack Obama’s Wall Street populism had he not been the largest recipient of Wall Street cash in presidential history, and Goldman Sachs’s largest political beneficiary.

So when immigration law is unenforced; when an arbitrary $20-billion punitive payout is mandated from BP; when some creditors are deemed more important than others; when some states are sued for racism, but cases against racist individuals are dropped — then a general impression takes hold among business people that it is safer to lie low and avoid the gaze of government — lest a particular law be applied in punitive fashion.

Why is this recovery L-shaped? It is not just what Barack Obama has done, but far more what he most certainly would like to do in the future. When business people look at the confiscatory government in Venezuela, crony capitalism in Russia and China, democratic socialism in Greece, and sky-high taxes in most of the European Union, they do not see a connection between those policies and individual prosperity and freedom. So even the faintest hint that America is no longer exceptionally at odds with state-run systems, but may in fact wish to emulate them, simply stuns private enterprise into inaction.

That is mostly where we are now, as an unpopular president tries to convince the wary, time-out private sector that what he said so emphatically in the past is now not quite what he really meant to say.

Good luck with that.

– NRO contributor Victor Davis Hanson is a senior fellow at the Hoover Institution, the editor of Makers of Ancient Strategy: From the Persian Wars to the Fall of Rome, and the author of The Father of Us All: War and History, Ancient and Modern.

 

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