Tuesday, September 18, 2012

Government fixes hinder the economy

All those knee-jerk attempts by government to fix the economy may have backfired. The Federal Reserve Bank of San Francisco notes:
Heightened uncertainty acts like a decline in aggregate demand because it depresses economic activity and holds down inflation. Policymakers typically try to counter uncertainty's economic effects by easing the stance of monetary policy. But, in the recent recession and recovery, nominal interest rates have been near zero and couldn't be lowered further. Consequently, uncertainty has reduced economic activity more than in previous recessions. Higher uncertainty is estimated to have lifted the U.S. unemployment rate by at least one percentage point since early 2008.
The study is pegged to consumer perceptions of uncertainty. I'd add that bureaucrats in the Obama administration have added to economic uncertainty as by piling on additional regulation over the private sector. And there's no telling how much uncertainty was triggered by healthcare reform. Demands that many coal fired electric plants be closed years ahead of prior expectations are another example of government induced uncertainty.

Attitudes like "we'll have to pass the bill to see what's in it" put a chill in the hearts of those charged with long term business planning. Faced with uncertainty, expansion plans are usually shelved. Businesses may even cut back as they hunker down until the storm of uncertainty passes.

Maybe it eludes the political minds in Washington, but too too many government demands for change are bad for the economy.

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