Productivity Declines, Fewer Startups, and Regime Uncertainty
In today’s Wall Street Journal, Edward C. Prescott and Lee E. Ohanian provide some important commentary on the causes of continuing slow recovery, the Bush-Obama-Fed Great Stagnation. Their conclusion:
Surveys of small-business owners clearly indicate that changes in economic policy are required to reverse this trend. Chamber of Commerce surveys show that roughly 80% of small-business owners believe that the U.S. economy is on the wrong track and that Washington is a major problem. Surveys by John Dearie and Courtney Gerduldig, authors of “Where the Jobs Are: Entrepreneurship and the Soul of the American Economy” (2013), show that entrepreneurs report being hamstrung by difficulties in finding skilled workers, by a complex tax code that penalizes small business, by regulations that raise the costs of doing business, and by difficulties in obtaining financing that have worsened since 2008.
There are clear solutions to these problems. Immigration reform that increases the pool of skilled workers and potential new entrepreneurs. Tax reform that reduces and equalizes marginal tax rates on capital income, including reducing the corporate income tax, which currently exceeds 40% in some states. Reforming Dodd-Frank to make it easier and cheaper for small business to obtain loans. Reducing the regulatory burden on all businesses.
In the absence of these reforms, there is little reason to believe that the depressed rate of new business creation will reverse itself. And if the trend is not reversed, then the current shortfall of $1 trillion per year in lost output due to lost productivity will continue.
Conspicuously absent from the list of culprits─The Federal Reserve’s zero interest rate policy (ZIRP) and quantitative easing. Salerno (A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis, p. 38) explains:
The rise in the natural interest rate that overcomes the pandemic demoralization among capitalists and entrepreneurs and sparks the recovery is reflected in the credit markets. For recovery to begin again, there needs to be a steep rise in the “real,” or inflation-adjusted, interest rate observed in financial markets. High interest rates do not stifle the recovery but are the sure sign that the readjustment of relative prices required to realign the production structure with economic reality is proceeding apace. The mislabeled “secondary deflation,” whether or not it is accompanied by an incidental monetary contraction, is thus an integral part of the adjustment process. It is the prerequisite for the renewal of entrepreneurial boldness and the restoration of confidence in monetary calculation. Decisions by banks and capitalist-entrepreneurs to temporarily hold rather than lend or invest a portion of accumulated savings in employing the factors of production and the corresponding rise of the loan and natural rates above some estimated “true” time preference rate does not impede but speeds up the recovery. This implies, of course, that any political attempt to arrest or reverse the decline in factor and asset prices through monetary manipulations or fiscal stimulus programs will retard or derail the recession-adjustment process.
For another argument on the adverse effects of ZIRP see Robert Higgs, The Fed’s Immiseration of People Who Live on Interest Earnings.
Also unspoken; Stagnation is the direct result of an economy suffering from Regime Uncertainty. Prescott and Ohanian highlight that which is seen. “Behind the productivity plunge: fewer startups.” They fail to highlight the unseen. Behind the fewer start ups: “Regime Uncertainty.”
Ohanian’s empirical work often supports Austrian interpretations of economic history. It should be remembered that other work has provided significant empirical research that bolsters Rothbard’s argument of how what should have been a garden variety recession developed into the Great Depression (see here), and supports both Vedder and Gallaway’s work and Robert Higgs’s “Regime Uncertainty” argument relative to the 1937 recession within a depression (see here and here ).