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Sluggish Economy? Blame Government-Induced Uncertainty

The Romeo Area Tea Party recently hosted Hillsdale College Economics Professor Dr. Gary Dr. Gary Wolfram, Hillsdale CollegeWolfram (pictured) at the Palazzo Grande in Shelby Township. The topic of conversation was how government was creating uncertainty and slowing the economic recovery from the 2008 recession.

“If I were to tell you that the recession ended in June 2009,” he opened, “you’d be surprised.” He’s right. The U.S. economy seems to be just “plowing along.”

According to Dr. Wolfram, businesses thrive on certainty and the government is causing so much uncertainty from new regulations and laws that businesses and entrepreneurs are holding back from expanding and hiring. Unless the economy is growing faster than 2%, you don’t need any more employees because production is growing at a rate that doesn’t require them.

During the first three months of 2013, the economic growth rate was 1.8%, which was slower than expected and revised down from original estimates of 2.4%. Three months prior to that the economy barely made headway with a growth rate of 0.4%.

Slow economic growth dramatically impacts the lives of all Americans, especially those in the lower and middle classes.

According to Dr. Wolfram, a normal unemployment rate should be at 5% or below, which would be termed “full employment.” Full employment means that roughly 6-7 million people are unemployed. Our current unemployment rate of 7.6% translates to nearly 12 million currently unemployed and 8 million employed part-time but looking for full-time work.

Additionally, the problem is compounded with long-term unemployment. Normally, the average time spent on unemployment is 17 weeks. Today, however, that number is 37 weeks. Employers look at long gaps in employment negatively. The longer someone is not working, the harder it is for that person to find a job. This increases the costs of temporary assistance to taxpayers, and because the government spends more than it takes in from revenue, that means more money is borrowed and more interest is paid.

Why is it that we’ve had such a slow recovery and four years later we have 20 million people looking for work and cannot find it? “It’s because we have an activist government causing uncertainty,” Dr. Wolfram opined. “You don’t know what the rules of the game are.”

Private investment drops with extreme uncertainty and that is exactly where we stand now. ObamaCare, Dodd-Frank, Cap & Trade, and other laws and regulations are causing extreme uncertainty in the markets.

Regarding ObamaCare: “They’ve already passed the bill, and we still don’t know what’s in it.” Wolfram continued, “We won’t know the ‘real’ costs until the middle of 2014 or later. We don’t know what the premiums will be.”

He followed up with an example. Imagine a carwash. The owner is looking to expand and hire new workers. One of the key factors when deciding to expand is labor costs, but the owner doesn’t know what those will be making it difficult, time consuming, and costly to provide more jobs and create more wealth.

This is precisely why, according to Dr. Wolfram, companies are holding back $3 trillion in private funds and banks are holding back $1.89 trillion.

Recessions are caused by central banks lowering interest rates. The Fed is perpetually keeping the rates low, which drives investment into areas it otherwise wouldn’t.

“Would we let the federal government set the price of toilet paper?” he said jokingly. “But we let them set the price of loanable funds (interest rates).”

These low interest rates have other negative effects. Low interest rates keep the cost for government to borrow money low, so that government spending can remain high. Currently, the interest on the debt is $240 billion per year. If interest rates were 5%, something more reasonable according to Dr. Wolfram, the interest on the debt per year would be between $750 billion and $1 trillion.

Is there hope? Dr. Wolfram concluded his lecture with a quote from Adam Smith, “The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security, is so powerful a principle, that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often incumbers its operations; through the effect of these obstructions is always more or less either to encroach upon its freedom, or to diminish its security.”

Solutions to problems do not come from the top. The farther away from the problem one seeks for a solution, the less knowledge there is. That is why the free market is the best system to create jobs, fight poverty, and improve the welfare of everyone because individuals are free to improve their lot only by benefiting another. As Adam Smith wrote, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.”

Entrepreneurs are waiting for certainty. Politicians should give them some certainty so that they can do what they do best: create wealth and prosperity.

Follow @gregmgeorge.

Greg George

Greg George is an Advocacy Coordinator with the Michigan Association of Public School Academies (MAPSA). Twitter: @GregMGeorge

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Categories: Budget and Finance, Must Read, Policy, Politics, Regulation

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