Just finished a great discussion about the economy with Bill Bennett on his radio show. One of the things we talked about was a Washington Post article by Ezra Klein titled, “The anti-business president’s pro-business recovery.” The gist:
This White House has “vilified industries,” complains the U.S. Chamber of Commerce. America is burdened with “an anti-business president,” moans the Weekly Standard.
Would that all presidents were this anti-business: According to the St. Louis Federal Reserve, corporate profits hit $1.37 trillion in the first quarter — an all-time high. Businesses are sitting on about $2 trillion in cash reserves. Business spending jumped 20 percent last quarter and is up by 13 percent against 2009. And the Obama administration has cut taxes for small businesses and big ones alike. Maybe the president could be anti-me for a while. I could use the money.
Corporate profits are a very small slice of a very large and complicated picture. We should round out the picture by asking whether the profits resulted from strong revenue growth or from recessionary cost-cutting — evidence indicates that it’s the latter. Those cash reserves look nice, until you look at the other side of the balance sheet: The total domestic debts of U.S. nonfinancial firms stand at $7.2 trillion, the highest level on record. And that increased business spending could turn out to be a bad thing if weak consumer demand leads to large unwanted inventories.
I’m pretty sure Klein understands this — he isn’t really trying to paint a rosy picture of the economy, and later in the piece he acknowledges that, despite all this supposed good news for businesses, they still just aren’t hiring. Klein’s real target is the argument that conservatives are making, which is that businesses are reluctant to hire because the bailouts, the Obama administration’s policies, and the Democratic Congress have created so much fiscal and regulatory uncertainty. Businesses don’t know what to expect from Washington next, so in the meantime they are cutting costs and building cash cushions.
Klein and many other supporters of the president’s policies argue that conservatives have exaggerated the problem of fiscal and regulatory uncertainty. The real problem, they say, is weak consumer demand. But here’s what I don’t understand: Why can’t weak consumer demand also be a function of fiscal uncertainty? If you felt like your taxes were likely to go up, your entitlement payouts were likely to go down, and the Democrats’ health-care reforms were unlikely to do anything about rising health-care costs, wouldn’t you be saving more? I know I am.
Klein’s article references the excellent This Time is Different, an exhaustive study of financial crises by Ken Rogoff and Carmen Reinhart, to emphasize the point that, look, financial crises are really bad, and recovering from them takes time. I continue to find it interesting that supporters of the president’s policies find it useful to quote Rogoff and Reinhart when advocating patience with the speed of the recovery but strive to ignore (and in some cases rabidly attack) the team’s related finding that debt-to-GDP levels over 90 percent are associated with notably weaker economic growth. And why might that be?
The simplest connection between public debt and growth is suggested by Robert Barro (1979). Assuming taxes ultimately need to be raised to achieve debt sustainability, the distortionary impact imply is likely to lower potential output.
As my friend Kevin Williamson likes to say (channeling Milton Friedman), the real tax rate is the rate of government spending, and I would wager that, Klein’s arguments to the contrary notwithstanding, the Democrats’ ongoing spending spree is a big part of why we’re not seeing a stronger recovery.
P.S. Just another quick note to keep in mind: “Pro-corporate” isn’t the same as “pro-business.” The Obama administration has perpetuated and initiated a number of policies that have helped a handful of specific corporations. That’s not the same as creating a climate in which productivity, innovation, and investment can drive economic growth.