Want to Know How to Define Regime Uncertainty?

My previous post looked at some Federal Reserve data and suggested some reasons why businesses are keeping money on the sidelines.

But there’s a famous line about how “a picture says a thousand words,” and this cartoon is a good example.

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Real-World Evidence for Regime Uncertainty?

There certainly are logical reasons to think that Obama’s policies are dampening economic growth. Investors and entrepreneurs have little reason to produce and take risks, after all, when they know the burden of government is going to climb. Especially when you add uncertainty to the mix.

Here’s a chart showing Federal Reserve data on the cash holdings of non-financial corporations. As you can see, there’s been a big jump in recent years. That’s certainly an indication that people are keeping money on the sidelines.

On the other hand, there’s been a long-term upward trend in the amount of cash companies are holding, so it’s a good idea to be cautious about drawing any sweeping conclusion from the recent jump. All we can say for sure is that bad policy reduces incentives for productive behavior. This is why bigger burdens of government are associated with slower growth.

And if there is a lot of very bad policy, a nation can suffer a lengthy period of stagnation or decline. Roosevelt and Hoover in the 1930s would be a good (or should we say bad?) example of this worst-case result.

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Washington Post Columnist Urges GOP to Move Left

For the umpteenth time, a Washington Post columnist has a turgid piece urging the Republican Party to embrace big government. Normally this type of column is written by a graybeard establishmentarian like David Broder or E.J. Dionne, but Ruth Marcus has decided to play the I-wonder-if-my-enemies-are-so-stupid-that-they’ll-accept-my-suggestion-to-commit-suicide game.

Marcus bases her argument on the fact that David Cameron and the U.K. Conservative Party are raising taxes and (supposedly) slashing spending. I have no idea whether Marcus is being deliberately dishonest, but I’ve already posted the unvarnished data showing U.K. government spending will rise by about twice the rate of inflation this year. If that’s a 25 percent cut, then I play centerfield for the New York Yankees.

Marcus is right about the Tory love affair with higher taxes. Indeed, her poorly researched column doesn’t go far enough. She failed to point out that Cameron is leaving in place the new 50 percent top tax rate, even though it almost certainly will result in less tax revenue.

To put it simply, Ruth Marcus wants Republicans to be like the Tories. But I’m guessing that she wants this result because it means bigger government under the guise of fiscal responsibility.

If Republicans had any brains (always a risky assumption), they will ignore this pre-scripted suicide note and actually do their jobs by saying no to higher taxes and saying yes (finally!) to real spending restaint.

I endured the Ruth Marcus column and it was paintful, so I don’t suggest you go through the trouble of reading it. If you’re curious about what she wrote, here’s an excerpt:

…instead of conjuring up sugarplum visions of pain-free change, the Conservatives are addressing their fiscal crisis with seriousness and specificity. Osborne is about to unveil an austere deficit-reduction plan that will cut most departmental budgets by 25 percent over several years. This is not some dead-on-arrival presidential budget; the parliamentary system means that these are for-real cuts. …Second, the Conservatives call for shared sacrifice, starting in a place Republicans seem never to look: at the top. “It’s fair that those with broader shoulders should bear a greater load,” Cameron said. …”Believe me, I understand that most higher rate taxpayers are not the super-rich,” Osborne said. “These days we’ve really got to focus the resources where they are most needed.” Here in the United States, when Democrats dare to propose higher taxes for households making more than $250,000 a year, Republicans shout “class warfare.” …the Conservatives do not embrace the Tea Party vision of government as malevolent force. “I don’t believe in laissez-faire,” Cameron said. …Cameron’s Conservatives do not suffer from the Republicans’ anaphylactic allergy to taxes. While Republicans insist on extending the Bush tax cuts for the wealthiest Americans, the Conservatives have endorsed tax increases. Yes, you read that right — even though the tax burden is already significantly higher in the United Kingdom. …The value-added tax will go from 17.5 percent to 20 percent. The capital gains tax will increase from 18 percent to 28 percent for high earners because, as Osborne said, sounding more like Warren Buffett than Margaret Thatcher, the rich are “paying less tax than the people who clean for them.”

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