Since the beginning of the financial crisis and the recession, we have tried the usual methods for combating a weak economy and unemployment--principally, federal spending and an accommodative monetary policy. Indeed, we have gone to extremes in this respect, with spending at historic levels and a monetary policy that has lowered short-term interest rates to nearly zero.
Obviously, as shown by the latest unemployment data, none of this is working. In my view, the problem is that Congress has adopted policies--in the form of the Patient Protection and Affordable Health Care Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act--that have made it difficult for businesses to anticipate their future costs. Both enactments are enormously complex and require both substantial regulatory interpretation and a great number of new rules to carry them out. The uncertainties associated with these acts have led to reluctance on the part of businesses to hire or to invest in long-term assets such as plant and long-lived equipment.
As we know, corporations are now sitting on enormous piles of cash but are unwilling to deploy these resources, and the small businesses that are profitable are refusing to expand. The conventional interpretation for this is that there is little demand because of unemployment and a weak housing market. However, in our current straits I believe cause and effect run the other way. Successful businesses are always ready to expand and gain market share. That is a manifestation of the "animal spirits" that Keynes observed in a growing economy. There is a reason why those spirits are now dormant.
This is not the first time we have faced intractable unemployment. The same thing occurred during the New Deal, when employment, which had averaged 6 percent during the 1920s, never dropped below 14 percent until the US began to prepare for war. The reason, I believe, was business uncertainty in the 1930s because of constantly shifting government policies and a well-founded fear of costly and adverse government action. That is what is afflicting us today.
Accordingly, the single most important step that the United States can take to restore job growth would be to repeal both the health care act and the Dodd-Frank act. I am aware of the political difficulties of doing this, but at some point President Obama, Congress, and the American people will realize that none of the traditional methods of stirring the "animal spirits" of the private sector is working. At that point, serious consideration will be given to the legislation that has been introduced in both Houses to repeal these improvident acts.
Peter J. Wallison is the Arthur F. Burns Scholar in Financial Policy Studies at AEI.