Home > Bias, Keynesian Economics, Liberal, Regime Uncertainty, Regulation > Does Obama have a CEO problem or is Fareed Zakaria just not as smart as he thinks he is?

Does Obama have a CEO problem or is Fareed Zakaria just not as smart as he thinks he is?

Judging by Zakaria’s latest column, Obama’s CEO problem, I’m going with the second.

Now I’m not a fan of Zakaria. I find his analysis pedestrian at best. In his column Zakaria notes, correctly:

Actually, there is a second stimulus that could have a dramatic effect on the economy — even more so than government spending. And it won’t add to the deficit.

The Federal Reserve recently reported that America’s 500 largest nonfinancial companies have accumulated an astonishing $1.8 trillion of cash on their balance sheets. By any calculation (for example, as a percentage of assets), this is higher than it has been in almost half a century. Yet most corporations are not spending this money on new plants, equipment or workers. Were they to loosen their purse strings, hundreds of billions of dollars would start pouring through the economy. These investments would probably have greater effect and staying power than a government stimulus.

…that “stimulus” is investment. Investment is what drives growth, innovation and productivity. I really don’t like how Zakaria uses the word “stimulus” for investment. Investment is the blood that drives the economy, it’s not some caffeine fix that gets things going. Investment has no stimulating effects, it is the whole damn thing.

The simple Keynesian equation that “models” the economy is C + I + G + NV = Y. Every time you hear a squirmy head on TV talk about aggregate demand, they are almost always talking about C, consumption. Their “solution” is more G, thanks to some fancy hand waving that says the multiplier is greater than 1.

Using that Keynesian framework, a “stimulus” of $800 billions should, in theory, give some real quantitative results, in jobs and GDP. So why is GDP still going down? Zakaria makes the same insane arguments that DeLong and Krugman make. That the solution is more “stimulus.”

To be clear: There is a strong case for a temporary and targeted government stimulus. Consumers and companies are being very cautious about spending. Right now, government spending is keeping the economy afloat. Without a second stimulus, state and local governments will have to slash spending and raise taxes, which will produce a downward spiral of higher unemployment, slower growth, lower tax revenue and a larger deficit. Joel Klein, the New York City schools chancellor, told me that when the stimulus money runs out at the end of this year, he will be forced to lay off 5,000 teachers. Multiply that example a thousand times to get a sense of what 2011 could look like.

The only correct thing in that whole paragraph is in bold. There is not “strong case” for a second round of stimulus, since the first didn’t produce any result. Neither did Bush’s “stimulus” rebate checks. The reason why it doesn’t make a dent in GDP is in bold. The real question Zakaria should be asking is why are people, consumers and producers, scared? He did, but he fails to connect the dots. (Didn’t I say his analysis was pedestrian?)

So why are they reluctant, despite having mounds of cash? I put this question to a series of business leaders, all of whom were expansive on the topic yet did not want to be quoted by name, for fear of offending people in Washington.

Economic uncertainty was the primary cause of their caution. “We’ve just been through a tsunami and that produces caution,” one told me. But in addition to economics, they kept talking about politics, about the uncertainty surrounding regulations and taxes. Some have even begun to speak out publicly. Jeffrey Immelt, chief executive of General Electric, complained Friday that government was not in sync with entrepreneurs. The Business Roundtable, which had supported the Obama administration, has begun to complain about the myriad laws and regulations being cooked up in Washington.

The answer is Regime Uncertainty. Anyone who reads this blog should know about regime uncertainty and Robert Higgs by now. So there’s your answer to why businesses aren’t investing and why the economy is still in the crapper. They are scared to invest because they don’t know what Obama is going to do next.

Most of the business leaders I spoke to had voted for Barack Obama. They still admire him. Those who had met him thought he was unusually smart. But all think he is, at his core, anti-business. When I asked for specifics, they pointed to the fact that Obama has no business executives in his Cabinet, that he rarely consults with CEOs (except for photo ops), that he has almost no private-sector experience, that he’s made clear he thinks government and nonprofit work are superior to the private sector. It all added up to a profound sense of distrust.

Of course Zakaria has to pander to Obama here a bit. He is, afterall, an editor at Newsweek. That might be the main reason why Fareed doesn’t mention Higgs or Regime Uncertainty in his column. To do so would be to expose Liberals, the kind that read Zakaria, to the idea that Government can hurt recovery. It would expose them to the theory that FDR’s New Deal policies, gasp, didn’t do anything but hurt American for most the 30s.

To expose his readers to the idea of Regime Uncertainty, would be a terrible sin in the Church of American Liberalism. A sin almost as bad as being skeptical on Global Warming. So instead Zakaria frames his piece like an anthropologist, “Why aren’t these crazy creatures called CEOs investing?”

This might sound like psychology more than economics, and the populist left will surely scream that the last thing we need to do is pander to business.

It plays to liberal bias against businesses, that they are all a cabal who’s only purpose is to destroy the middle class.

So maybe I need to change my thesis. Zakaria isn’t dumb. Quite the contrary, he is very smart. He just isn’t intellectually honest, that’s all.

  1. yttik
    July 7, 2010 at 10:49

    What they are doing to our economy is just maddening. What all these economists and so called financial experts are saying about how to improve things is just insane.

    Unemployment benefits are going to create jobs? Give me a bloody break! That money comes from employers, many who can’t afford to hire anybody right now because all the government mandates, like unemployment insurance! A 27% increase in some states.

    So yes, regime uncertainty is impacting everybody, but the reason we’re all so scared about the uncertainty is because we’re already paying out more than we can afford and we just can’t absorb any more cost. It’s not rocket science, you can lower wages, increase costs, or refuse to hire anybody. Wages are already low, you can’t raise prices in a bad economy, so option number 3 rules the day.

    • July 9, 2010 at 03:32

      The economy won’t recover until the regime uncertainty ends. They are trying to imitate FDR and they are getting the same result…a prolonged recession that might turn into a depression.

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