Dallas Fed Bank President: Policy Uncertainty “Cripples Job Creation”
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I have a confession to make.
I have a favorite Federal Reserve regional bank president. I admit to this level of economic geekiness after Richard Fisher of the Dallas Federal Reserve bank made a ton of good points in a speech on how policy uncertainty holds back the economy. He’s talked about this for some time, but this is the most-comprehensive I’ve heard him give on this. I’m just going to start quoting liberally:
American businesses are muscular and fit, rich and ready to roll. Now, what do we need to induce them to hire and put the American people back to work in order to restore economic growth and prosperity?
At home, our government is drowning in debt and is hyper-leveraged. The cost of its debt burden is being mitigated by accommodative monetary policy, but our federal government has reached its limit as a direct source of aggregate demand or investment impetus. Even if we wanted to, we cannot look to government to propel the economy forward. This leaves domestic consumption and investment by the private sector as the best hope for us to remain “the brightest spot in the world economy.”
You can’t grow income unless you put the American people back to work. And you can’t put the people back to work unless businesses invest and expand their payrolls. But here is the rub: You can’t expect businesses to expand payrolls or job-creating [capital expenditures] unless they decide to use the abundant cash and cheap credit they have ready access to; they will not invest if they are totally uncertain about the return they might earn on that investment.
The first thing an aspiring MBA candidate or any entrepreneur learns is that business is the art of decisionmaking under conditions of uncertainty. Businesses can manage around a reasonable amount of uncertainty. But under conditions of total uncertainty, they cannot make the kinds of strategic decisions that result in significant expansion.
Fisher gives some specific examples of policy uncertainty [emphasis mine]:
A feckless American government—specifically, a Congress that hasn’t created a budget for more than three years—is poised to drive us off the so-called fiscal cliff. It has contrived a tax code and regulatory structure that would baffle a financial Houdini, has compounded the uncertainty facing businesses to a stifling degree. At present, no business—big or small, public or private—knows what its tax rates will be going forward. No business knows the social overhead needed to cover their employees. No business knows the degree to which federal spending programs will be changed or truncated, and how that will impact it or its customer base.
As we see, without this certainty about future costs and demand, businesses won’t hire or invest beyond their replacement needs. Uncertainty “cripples job creation, capital investment and the ability of businesses to realize their potential,” according to Fisher.
What does Fisher advise?
The fix lies solely in the hands of a government that has the power to shape taxes and spending programs to incent businesses to go out and hire rather than ball up into a defensive crouch, or worse, go elsewhere in the world that we worked so hard to liberate, to create jobs for others rather than for our own people.
The private sector and American business community are poised to expand. But they will not do so as long as we have a government that cannot resist the temptation to devise a politically convenient patchwork instead of laying out a convincing, reliable, long-term program that job creators and consumers can count on and plan around.
He emphasizes a “long-term program,” because a short-term fix will only give businesses “another reason to stall until a long-term, dependable resolution is crafted.”
While not explicitly saying so, Fisher implies that Washington must avoid the “fiscal cliff” of automatic tax increases and spending cuts set to happen in 2013. Extending the 2001/2003 tax rates and tax provisions that have or will soon expire and crafting smarter budget cuts than what sequestration will impose will ease the short- and middle-term concerns of the economy falling into recession. But Congress and the administration need to work on the bigger issues of comprehensive, pro-growth tax reform and spending reform that seriously addresses entitlement spending.
Taking these constructive actions—starting after Congress returns for their lame duck session—will boost business confidence, help them know what to expect in the future, and allow them to plan future investments and hiring to get Americans back to work and grow the economy.