Allan Meltzer is perhaps the greatest living monetary economist; his A History of the Federal Reserve, is the definitive standard on the Fed. He was a contemporary of Milton Friedman, and a noted monetarist scholar in his own right. Discussing the Fed today, he ventures slightly off course:
Broadly speaking, the Obama administration has pursued a course the opposite of that taken by the Kennedy and Johnson administrations in the 1960s (and the Reagan administration in the 1980s). Kennedy-Johnson enacted across-the-board tax cuts: Promoting growth came first, redistribution later. By putting redistribution first and sacrificing growth, the Obama administration got neither.
In my mind, Professor Meltzer is clearly right. There is a significant under-appreciation of the effects of policy (or regime) uncertainty on economic activity. The entrepreneur’s job is difficult enough in trying to forecast future consumer demand. When the government decides to change the “rules of the game,” it creates an additional layer of uncertainty, and unfortunately uncertainty seems to be non-linear–more government changes produce increasing levels of uncertainty for entrepreneurs, leading to investment paralysis. When the rules of the game are changing rapidly, only the most certain or most potentially remunerative projects will be undertaken. When we think of policy uncertainty, we are all well aware of Obamacare–but we need to remember the totality of the uncertainty that Mr. Obama created. Recall he came in wanting cap and trade, has declared war on coal-power, with mixed reactions to natural gas. Marc Clauson highlighted the incredible breadth of regulatory growth under Mr. Obama just a few days ago. And Mr. Obama has not yet had a tax rate on the “rich” that he could agree with. Further, spending is still a significant problem–businesses rightly wonder what their long term tax treatment will be if we are not to become Greece. Dodd-Frank is still unknown as to its ultimate effects, but the short term appear to be putting small banks out of business, while forcing bank consolidation, making even more banking institutions “too big to fail.” In his class warfare rhetoric, Mr. Obama wants more unions, more lawsuits for gender equality, and higher taxes. Meanwhile, we have nearly universal agreement that our corporate tax rate is ineffective and foolish–both Democrats and Republicans agree that the rate should be lowered and the base broadened through loophole closures–yet nothing is proposed or done on this. We could go on and on, but Mr. Meltzer’s point seems well made–policy actions have consequences. Mr. Meltzer correctly notes that there is a cost to regime uncertainty; by promoting redistribution Mr. Obama is killing the very golden goose that would lay the eggs he’d like to consume. At some point we will all recognize we are not living in the Bush economy, but the Obama economy. Do you like what you see?