TJP

Pundits and politicians talk about economic uncertainty as if it was some type of monetary currency; it is not. They claim that it prevents investments; it does not. Investment depends on consumer demand. And, demand has never been a function of uncertainty; rather it is a function of income and prices.

Thus, the narrative of uncertainty preventing investments is misleading.

Uncertainty proponents argue that consumers and businesses are not spending because they are uncertain of taxes, regulations, and other possible government mandates.

However, no one has complete information. Hence, all decisions involve some degree of uncertainty and the degree is a function of the decision-makers’ ability.

For uncertainty to prevail in the market, it would mean that individuals and businesses are incapable of comparing and ranking alternatives, that increasing returns to scale prevents them from facing the same fixed prices, and technological external effects cause the actions of one or more individuals to affect the level of satisfaction or output of other individuals.

In the decision-making process, uncertainty or risk always exists. People and businesses do not know with certainty what challenges they will confront tomorrow or next year. Therefore, decisions depend on perceived opportunities and risk preferences.

As a result, based on their decision horizon, individuals and businesses evaluate potential opportunities and challenges before investing. For instance, a business would want to know whether the demand for its products or services would lead to positive or negative returns before investing.

However, the demand for its products or services depends on consumers’ aggregate disposable income, as well of their preferences, not on uncertainty. If consumers’ real disposable income fell, demand for their products or services would fall.

Therefore, the perceived costs of the firm products or services could exceed its revenue, and the firm is unlikely to undertake the investment and it will not create jobs.

It is clear that job creation is contingent on consumers’ real disposable income and that the narrative of uncertainty (risk) in the political discourse is a distraction. It is basically a rehashing of the neoclassical economic model that views narratives (formation of expectations) as capable of changing economic fundamentals.

The neoclassical argument is that developing a narrative (a signal) in the present can lead people to form expectations of the future. Thus, providing a narrative of a bad signal today would lead people to think of the likelihood of bad outcomes associated with that signal in the future.

For instance, signaling that government expenditure causes economic problems would lead people to believe that government spending is the problem.

So, if hurricane Irene devastates your community the government should not provide relief, or if the economy is not generating enough demand, the government should not become the spender of last resort.

Unfortunately, political infighting will not change reality. The realities that confront us will continue regardless of the political party in power.

Thus, it is a grave intertemporal mistake to prevent the current administration from priming the economic pump. Preventing the administration from priming the economy reduces standards of living and jeopardizes national security.

Post Comment