The national unemployment rate remains stubbornly high – 9.5 percent in June – and the private sector simply isn’t willing yet to make a genuine effort to create jobs. Some contend that to stimulate the economy, the government should spend and borrow more. This argument ignores a central reason for the lack of job creation: policy-induced uncertainty.
Total non-farm payroll declined in June by 125,000, according to the Bureau of Labor Statistics (BLS). While the unemployment rate edged down slightly to 9.5 percent from 9.7 percent in May, the main reason for the decline was the rise in unemployed workers no longer actively looking for work, a real sign of hopelessness. A year ago, 29.6 percent of unemployed workers had been so for 27 weeks or longer, which the BLS defines as long-term unemployed. This year, the figure is 45.5 percent.
The Obama administration, meanwhile, has been preoccupied with avoiding the mistakes of the Great Depression, but in too many cases, it has made the same errors. By increasing uncertainty, the administration has made it significantly more difficult for businesses to invest, the heart of private-sector job creation. This is eerily similar to the manifold mistakes made by President Franklin D. Roosevelt during the Great Depression, as documented in Amity Shlaes’”The Forgotten Man: A New History of the Great Depression.”
The decision to invest, whether expanding existing businesses, creating new ones or pursuing innovation, is inherently risky. In the best of times, businesses have to manage their risk and concentrate on building success and achieving positive results for their owners, customers and employees. Increasing uncertainty makes managing risk more difficult, which impedes investment. Put simply, if you want an explanation of why U.S. businesses are sitting on an estimated $2 trillion in cash, the answer is that the future is so uncertain that reasonably informed decisions about investment become practically impossible.
Under George W. Bush and Barack Obama, the Federal Reserve and the Treasury intervened to save Bear Stearns, decided to let Lehman Brothers fail and then repeatedly intervened on behalf of AIG. Stanford University economist John B. Taylor has documented in compelling fashion how this approach led to greater uncertainty about the rules and framework the government was using to determine appropriate intervention. Firms in capital markets simply didn’t know what the government would do. Next came the undoing of long-standing legal precedent in bankruptcy laws.
The Obama administration intervened in both the GM and Chrysler bankruptcies to ensure that the financial interests of employees (and their unions) were given priority over those of secured creditors. The whole point of secured credit is to be first in line in the event of financial failure. The administration intervened, however, and secured bondholders took much larger losses than other groups without protected security. As a result, it is unclear how “secure” such bondholders actually are when dealing with certain sectors of the economy or the administration more broadly. A series of policies already passed or being pursued by the Obama administration and the Democrat-controlled Congress is making things even worse.
The ambiguity about many aspects of Obamacare and the increasing recognition of its true costs, particularly to employers, are putting real dampers on business confidence and the ability to invest. The re-regulation of financial markets and institutions poses new threats to risk management as well as the cost of borrowing. The pursuit of environmental regulation through a proposed “cap-and-trade” bill that would significantly increase energy costs has similarly dampened business enthusiasm for investing in America.
Add the scheduled expiration of the Bush tax cuts, the already-passed Obama tax increases and the likelihood of significant tax increases – perhaps even a national sales tax – to tame an unwieldy and increasingly worrisome deficit. The prospects for future taxes becomes depressingly clear.
Uncertainty is stifling business investment and expansion. If U.S. employment is to recover, it will do so only through private-sector job creation, which is predicated on a healthy economy and investment. The administration must undo some policies and stop pursuing others in order to create an environment within which businesses will take risks and in which our economy can return to prosperity.
Jason Clemens is director of research and Lingxiao Ou is a research intern at the Pacific Research Institute.