Posts Tagged ‘Uncertainty’

I recently posted data showing how companies are sitting on lots of cash, presumably in part because the business climate is not conducive to investment and job creation. I also showed a cartoon that makes the same point in an amusing – yet insightful – manner.

Now let’s look at data from the Federal Reserve, showing the amount of “excess reserves” that banks are holding at the Fed. This is money that is available for loans, but financial institutions apparently don’t see many profitable opportunities to put that money to work. This is perhaps the biggest indictment of Obamanomics since banks exist to make money issuing loans.

Just as I warned in my previous post, there presumably are many factors that are causing banks to keep more reserves than necessary with the Fed. Having been burned during the financial crisis, banks probably would be more cautious, even if Obama was pursuing good policy. Nonetheless, it certainly seems like Obamanomics is just as much of a failure as Bushnomics – which makes sense since both mean bigger government and more intervention.

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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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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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One of the main factors determining incumbent election success is economic performance. When disposable income is rising and people feel good about the future, it is difficult for an incumbent to lose. So why, then, is Obama pursuing policies that are undermining growth? Sure, it is in the interests of the left in the long run to create more dependency on government. That’s one of the reasons why there is nothing resembling a free market party in most European nations. But America isn’t at that stage yet (thankfully). And as John Stossel writes, Obama’s bad government policy is causing joblessness and uncertainty. This is going to hurt Democrats this November and may linger until 2012, when Obama would suffer the consequences (in the unlikely event that Republicans put forth a semi-decent candidate).
Why isn’t the economy recovering? After previous recessions, unemployment didn’t get stuck at close to 10 percent. If left alone, the economy can and does heal itself, as the mistakes of the previous inflationary boom are corrected. The problem today is that the economy is not being left alone. Instead, it is haunted by uncertainty on a hundred fronts. When rules are unintelligible and unpredictable, when new workers are potential threats because of Labor Department regulations, businesses have little confidence to hire. President Obama’s vaunted legislative record not only left entrepreneurs with the burden of bigger government, it also makes it impossible for them to accurately estimate the new burden. In at least three big areas — health insurance, financial regulation and taxes — no one can know what will happen. …Nothing more effectively freezes business in place than what economist and historian Robert Higgs calls “regime uncertainty.”

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