Making FDR's Mistake II

Uncertainty reduces investment which reduces job growth.

I've been wondering if we'll get a double dip recession or merely a slow recovery. My concern about a double dip is that business investment spending has tanked and it could send us back into a recession. I think that the reason investment has tanked is because of uncertainty. This time it's not uncertainty about consumer spending, but uncertainty about the structure of the economy and the rules we'll have to live under.

Writing in the Wall Street Journal, Gary Becker, Steve Davis and Kevin Murphy see the uncertainty as leading to a slow recovery.

In terms of discouraging a rapid recovery, other government proposals created greater uncertainty and risk for businesses and investors. These include plans to increase greatly marginal tax rates for higher incomes. In addition, discussions at the Copenhagen conference and by the president to impose high taxes on carbon dioxide emissions must surely discourage investments in refineries, power plants, factories and other businesses that are big emitters of greenhouse gases.

Congressional "reforms" of the American health delivery system have gone through dozens of versions. The separate bills passed by the House and Senate worry small businesses, in particular. They fear their labor costs will increase because of mandates to spend much more on health insurance for their employees. The resulting reluctance of small businesses to invest, expand and hire harms households as well, because it slows the creation of new jobs and the growth of labor incomes.

I am a bit less optimistic. I think we went through this process once before with another president and it wasn't pretty. Amity Shlaes wrote a book about it.

HT: Greg Mankiw