Is There a Confidence Crisis?

July 8, 2010

The New Republic’s Jon Chait, citing the New York Times’ economist-columnist Paul Krugman, takes shots at the idea that hyperactive government activity has generated uncertainty in the marketplace and thus put downward pressure on investment and hiring (”The Nonexistent Confidence Crisis,” he calls it). Chait says there is not much business investment these days because “there’s not enough consumer demand. That’s the whole story.”

The whole story? I just got done moderating a panel sponsored by the National Chamber Foundation and the American Enterprise Institute on regulation and the economy. One of the participants was from a company called Blessey Marine Services, an inland waterway shipping company. He says without a doubt the uncertainty over healthcare regulation has played a big part in the firm’s recent decisions not to hire and invest. The logic is simple—since the firm doesn’t know how much healthcare reform will cost them, and since they self-insure all their employees, they are keeping a lot of dry powder. This was just one example he pointed to among many of the ways in which policy and regulatory uncertainty make risk-taking and investment more difficult.

A similar note was sounded by New York University’s Tom Cooley who in a recent article noted: “The Bureau of Economic Analysis reports that U.S. corporations are sitting on $1.6 trillion in cash reserves, a record amount, because they are reluctant to expand in the uncertain policy environment. Even looking at the companies in the Standard & Poor's 500 index of blue chips--and stripping out financials, which are required by regulators to keep large cash reserves in order to cushion against risk--the cash-on-hand number is a whopping $1.1 trillion. Would a more transparent, business-friendly environment turn that cash into investment and jobs?”

It was clear from our discussion that the answer is yes. No one doubts aggregate demand is down; but there is no doubt that some kinds of government activity dampen animal spirits and entrepreneurship and encourage hoarding. Policymakers in both parties in Washington should take note.