Wednesday, August 25, 2010

FUD

FUD = Fear, Uncertainty, and Doubt

FUD is the underlying reason for the economic doldrums we find ourselves in. As George Melloan pointed out in a WSJ editorial yesterday, individuals and businesses are focusing on paying off debt and building cash reserves, for the simple reason that the economic uncertainty level is high. Without the stimulus of business and consumer spending (not government spending - see the second paragraph below), the unemployment rate will remain high. The high unemployment rate serves as a brake on economic growth, which in turn constrains increased hiring. All this results in a vicious circle, or even worse, an economic death spiral.
The Obama administration and Congress have dumped a huge load of highly dubious new legislation on Americans, much of it unread even by the legislators who voted for it. ObamaCare is an attempted federal takeover of a vast and complex industry. No one really knows how much chaos the financial sector "reform" act will generate. Hyperactive zealots in federal bureaucracies such as the Environmental Protection Agency have been unleashed to do silly things like attempt to reduce the planet's supply of carbon dioxide.

A massively expensive federal "stimulus" program failed to stimulate for the easily predictable reason that the money the government spends on its political projects robs the rest of the economy of resources. 

State and local governments are, on the whole, in terrible financial shape, which means that they will likely be shedding employees and adding to the ranks of the unemployed. The only remedy the Democrats have for cutting the deficit is higher taxes, which in a weak economy likely would be counterproductive.

The prevailing sentiment among business leaders ... is that "the politicians and officials who craft and enforce the rules are doing so in a capricious manner that makes long-term planning difficult, if not impossible. They are increasingly distressed by the lack of consistent direction coming from Washington. . . . So they are calling time-outs and heading for the sidelines while they wait for the referees to settle the rules of the game."
In the late 1970s, the last time Americans suffered from manic interventionism from Washington, we had "stagflation," a combination of minimal economic growth and double-digit inflation. It wasn't pretty.

Stagflation was cured by a set of policies that reversed the Keynesian nostrums then in vogue and that are again the core basis for federal economic policy. In the early 1980s, the Fed tightened money, tax rates were cut, economic regulation was pared sharply and an effort was made to curb nondefense spending. It worked quite well, producing 25 years of economic growth. It will be much harder to repair today's damage, but the need to make another try is becoming urgent.
I remember the late '70s. Carter was president. The economy sucked, the Iranians were pushing the U.S. around, and the country's morale was pretty low. Sound familiar?

The cure was electing a president who believed in America, and who inspired the citizens to do the same. Reagan's greatest gift to this country was the elimination of FUD. His clear, simple, and consistent message was that government should get out of the way and let the free market work. While his actions didn't always match his words (he was, after all, a politician) regulations were loosened and taxes were cut. The economy grew and employment increased, a lesson that seems to be lost on the current administration. 

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