I agree with Greg that the dominant empirical fact about investment is its procyclical volatility (the main reason investment has been depressed for the last two years is that the economy has been depressed), and also that the recent credit crunch made it worse. But I don’t agree with a third item on his list: “the policy environment seems adverse to business.” As in many areas, it is when we get to the politics that I disagree.
Greg cites trade policy, fiscal imbalances, and energy costs, in support of his proposition that the current policy environment is anti-business. Let’s consider each of the three.
Trade. I wasn’t happy in September when the White House put tariffs on imports of Chinese tires. But President Obama, despite the pressures of the most severe recession since the 1930s, has yet to succumb to any protectionist measures as big or as blatantly in violation of international trade agreements as were Ronald Reagan’s quotas on Japanese auto imports or George W. Bush’s tariffs on steel imports, in response to the 1981-82 and 2001 recessions, respectively. (Greg, of course, was the Chair of Bush’s Council of Economic Advisers.)
Budget. Most of us think that the $787 billion fiscal stimulus and the distasteful banking rescues were necessary responses to the recession. But let’s address the serious question of the bleak longer term fiscal outlook. It is known to those who look carefully at the budget numbers that Obama’s recent actions are a distant 4th on the list of contributors. (OMB, CBO, GAO and respected private economists.) #1 in the long term (by far) are the future costs of Social Security and Medicare, the approach of which we have been watching for several decades. #2 are the effects of Bush’s tax cuts and spending increases (including foreign wars and the expansion of Medicare benefits, among other things). Substantially smaller is #3, the loss of tax revenues from the recession that began December 2007. A distant #4, as I say, is the recent fiscal stimulus. (The banking layouts are being repaid, usually with a high return for the Treasury – as the Administration had predicted, to critics’ ridicule.) I believe that as the recovery becomes better established Obama will, as he says, take much more serious steps than his predecessor in the direction of long-run fiscal consolidation. But only time will tell.
Energy costs. Greg Mankiw in fact believes that a system of energy taxes or cap-and-trade would increase the efficiency of the economy, even though it would raise the relative price of energy. (This is all the more true if the comparison is to past policies of subsidizing oil and other fossil fuels.) Greg founded the Pigou Club on this principle, and I heartily congratulate him for it.
I am skeptical that investment is currently depressed by perceptions of an anti-business climate. But if the average businessperson does in fact have the perception that recent Democratic administrations have been worse for business than Republican administrations, I suggest setting aside campaign rhetoric and looking at actual history. Start with the fact that, in the graph in Greg’s blog post, investment growth was substantially higher during the Clinton Administration than during the Reagan or Bush Administrations. Investment will recover when the economy does.