Monday, January 4, 2010

It's The Uncertainty Stupid

Greg Maniw asks the question "why is the recovery so tepid?" then links to the answer in an article by Gary S. Becker, Steven J. Davis and Kevin M. Murphy in today's Wall Street Journal. The authors believe there is a two-part explanation why the recovery has been listless. The first explanation is obvious, the severity of the financial crisis that precipitated the recession was vast shattering confidence in financial markets, and leaving homeowners overextended and unemployed.

The second explanation is not quite as obvious though it has been quite obvious to those who truly generate jobs and growth; it's the uncertainty the Democratic majorities and their policy agenda that have hung over the recovery like the Sword of Damocles:
Liberal Democrats won a major victory in the 2008 elections, winning the presidency and large majorities in both the House and Senate. They interpreted this as evidence that a large majority of Americans want major reforms in the economy, health-care and many other areas. So in addition to continuing and extending the Bush-initiated bailout of banks, AIG, General Motors, Chrysler and other companies, Congress and President Obama signaled their intentions to introduce major changes in taxes, government spending and regulations—changes that could radically transform the American economy.
 In short the authors make the case that Democrats have inserted themselves into every aspect of the economy proposing and instituting changes that stifle recovery or threaten to as we see with cap and trade legislation and health care.  For example, there was an article in the Philadelphia Inquirer yesterday detailing how the looming health care legislation has impacted the building industry.   The impact of the legislation has left both builders and facilities large and small facing uncertainty:
As for how health-care reform will influence facilities needs, Schwartz said: "It's a little early to tell." "The opportunity to have more patients covered with insurance so there are less patients that are self-pay will be a positive for hospitals," he said.

However, what could offset that, he added, are "the anticipated reductions in Medicare payments. So we'll see." Richard P. Miller, president and chief executive officer of Virtua Health, which operates four hospitals in South Jersey, contends most of the health-care reform pinch will be felt by smaller medical facilities.

Many, he said, are already struggling to find the significant resources needed to invest in the latest information technology - a growing area of importance as medical records shift from paper to electronic. Those hospitals will have to merge with bigger health-care systems such as Virtua, he said, or risk going out of business.

Despite the economic downturn, Virtua decided to press on with its new 365-bed hospital in Voorhees - including a seven-story patient tower and a five-story diagnostic and testing facility. But it wasn't easy. Miller said the health system had to dip into its cash reserves for $100 million to get the hospital started in spring 2007.

"There were no capital markets for major construction," he said
Truth be told, the builders and health care executives are not the only ones who are uncertain of the impact of the health care legislation, Congress has voted for bills they had only seen, let alone read, just hours before their vote.  It's absurd to think the Democrats, so determined to get a win at any cost, have any real sense of the impact and consequences of their legislation on a sector that is close to 1/5th of the entire economy.  Consequences of the legislation create uncertainty in the construction, manufacturing and other sectors as well.  The reverberations are enormous.

Democrats have pressed ahead to pass legislation that is incredibly unpopular with the public.  The public in fact has been asking them to stabilize the economy and leave health care, cap and trade and other major changes on the back burner.  This is precisely the advice to Democrats the WSJ article gives as well:
They should have put plans to re-engineer the economy on the backburner, and kept them there until the economy emerged fully from the recession and returned to robust growth. By failing to adopt a measured approach to economic policy, Congress and the president may be slowing the economic recovery, and thereby prolonging the distress from the recession.
Democrats have done little else in the past year but "create and save" uncertainty.  Oh, and they've spent an awful lot of money in the process.  None of this bodes well for their looming report card in November.  I am fairly certain they won't be getting a B+ from the voters.

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