Obama Offered Platitudes Over Real Economic Solutions

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President Obama's State of the Union Address focused primarily on short-term fixes for cyclical problems. His goal is to shore up those struggling economically until the economy rights itself and growth is restored. The president was less sanguine about long-term economic growth. While he uttered platitudes about tax reform and the need to keep jobs in the United States rather than ship them abroad, he offered no new details on long-term problems such as entitlement reform and the federal debt, which threaten future growth.

With a tax code that becomes more complicated by the year, and a regulatory burden that is fast-tracked for expansion, improving economic growth may be challenging. Coupled with a looming crisis in entitlement spending, many economists have suggested that Washington is generating significant amounts of policy uncertainty that give investors pause when it comes to pouring resources into the U.S. economy.

A recent National Bureau of Economic Research working paper by Scott Baker, Nicholas Bloom, Brandice Canes-Wrone, Steven J. Davis and Jonathan Rodden examines the increase in policy uncertainty. The authors identify two sources of policy uncertainty-both products of Washington-that have steadily increased since 1960. The first source is the output of Washington-spending, taxes and regulation. As government has grown, complexity has increased, making it much more difficult for firms and entrepreneurs to keep pace with the changes. As this tide of compliance rises, uncertainty also rises, thwarting investment and driving business elsewhere.

The second source of policy uncertainty identified by the authors arises from the structure of Washington and the role of Congress. Baker et al. have identified an increasing polarization of both the electorate and Congress since 1960, which has made it more difficult to reach consensus and predict future policies. Electoral swings can generate policy swings that again increase the level of uncertainty. With President Obama poised to wield the pen and rule by executive order, policy uncertainty will continue. Regulatory agencies are moving forward with a significant new regulatory regime, and the executive orders will only rankle Republicans further, leading to more polarization and uncertainty.

While the notion of policy uncertainty has become more popular with economists in recent years, there remains an even more troubling proposition: policy certainty about the long-term fiscal challenges facing the United States. It may be true that businesses find it more and more difficult to navigate the waters of Washington, D.C., but they may also see a very certain but bleak outlook for the U.S. economy. Increasing global competition, rising federal debt, along with an increasing tax and regulatory burden may be leading businesses to shy away from investments. New education initiatives or new public-private partnerships will do little to assuage these concerns.

If the president truly wants to boost economic growth, it is time to address long-term fundamentals. A real plan for fundamental tax reform should be put on the table. How about replacing the incomprehensible tax code with a simple, low flat tax? Entitlement reform should also be part of the discussion; we are fast running out of time to address these concerns.

The energy sector can also provide substantial windfalls. If the president truly wants to expedite the permitting process to create economic growth, try starting with the Keystone Pipeline. As a nation, the United States has the potential to be the world's leader in energy production, yet the administration's aggressive agenda to unilaterally reduce CO2 emissions is drastically reducing the nation's energy output. Despite the United States' potential to be top producer of natural gas, the president referred to natural gas as merely a "bridge fuel" to be supplanted by more exotic fuels such as solar power, which still provides well below 1 percent of the nation's energy.

In short, much work remains to be done to restore economic growth. While things have improved to some degree (with growth at 3.2 percent in the last quarter, despite the sequester), the economy overall remains anemic. In fact, by most measures, it is similar to the economy in 2008, when Obama took office. The focus on income inequality and minimum wage will do little to create sustainable, long-run economic growth. That requires investment in capital and increasing worker productivity. Whether it is short-run policy uncertainty or a bleak, long-run certainty, the administration needs to re-assess its economic priorities.


Wayne Brough, Ph.D is Chief Economist and Vice President of Research at FreedomWorks.  

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