Blinder’s Blinders

In a recent WSJ article, Princeton professor Alan Blinder, formerly vice chairman of the Federal Reserve, ruminates on the decline in productivity growth in the past couple of years. He methodically runs through various possible explanations for the slowdown. Is it a “statistical illusion”? Payback after the “marvelous performance” of 2009 and 2010 when GDP grew but companies were still too scared to hire? He thinks “a third hypothesis, weak investment, is more important”—which, however, only begs the question, why is investment weak? Then he points to “two less conventional, even counterintuitive, hypotheses.” Maybe the economy has become “less entrepreneurial” (which again begs the question, why?) or maybe – the final entry in his causal laundry list – technological progress has slowed.

Hilariously absent from Blinder’s list is the avalanche of new taxes and regulations that the Obama Administration dumped on the economy—Dodd Frank, Obamacare, the EPA war on fossil fuels, higher marginal tax rates plus a raft of Obamacare taxes, fulminations against “millionaires and billionaires,” no Keystone XL Pipeline, no corporate tax reform, etc. etc.   We have cited before the bitter complaints of CEO’s of major corporations—Intel, Eaton, 3M, JP Morgan, Wynn Resort, etc.   You cannot talk to a Wall Street pro without getting an earful about the huge increase in compliance costs; when firms hire tens of thousands of lawyers and compliance officers, productivity growth falls. Small banks complain they are burdened with the same regulations as too-big-to-fail behemoths; no wonder the number of bank start-ups has plummeted. The NFIB small business confidence index is still—six years into an economic recovery—well below the 1983-2007 average (which includes two recession). Given all this hostile interference from a know-it-all Federal bureaucracy, it is hardly surprising that business investment has lagged. What makes Blinder’s blinders all the more unpardonable is that this is a replay of the 1970s, when a raft of new regulations led to a productivity slowdown that was ultimately reversed by deregulation initiatives started in the Carter administration and continued by Reagan.

Blinder unintentionally demonstrates that, for all its scientific pretensions and mathematical pseudo-precision, economics is an inherently political discipline. You will not find what you do not look for, and liberal economists like Blinder and Krugman ignore government regulations that increase the risk and reduce the profitability of business investment. Then they wonder why business investment is weak.

The good news is that Washington’s attack on productivity could be reversed fairly quickly by a Republican administration that cuts taxes and regulations and prioritizes growth over redistribution.

Addendum: Obamacare and the Weak Consumer

Partly because they did not factor in the bearish impact of Obamanomics, Street economists have been too bullish on GDP for the past six years. Now they wonder why consumers have not boosted spending in response to the “tax cut” of dramatically lower oil prices. One plausible hypothesis that the Street has been very slow to embrace—but which is discussed in a CNBC article today—is that Obamacare is hitting consumers, in at least two ways. One is higher deductibles and co-pays for the expensive “soup-to-nuts” policies Obama forced on the middle class as a deceitful, hidden subsidy to the poor. Also, the “individual mandate” – get coverage or pay a fine – is hitting consumers this year.  Republicans ought to focus on this issue in order to connect Obamacare directly to “wage stagnation.”

Copyright Thomas Doerflinger 2015. All Rights Reserved.

 

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About tomdoerflinger

Thomas Doerflinger, PhD is a prominent observer of American capitalism – past, present and future. http://www.wallstreetandkstreet.com/?page_id=8
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