Bad Economic Policy Turns Out to be Bad Economic Policy

Now There’s a Surprise

Way back in late 2010 when President Obama was in a policy conflict with the Republicans over extending the Bush tax cuts for everyone (they won, he lost in case you do not remember) Obama and his economic team (brain trust?) came up with some economic policy they thought would spur the recovery.  In addition to extending the Bush tax cuts for all the major parts of the policy were to

1. Cut the payroll tax on employees by 2 percentage points.

2.  Provide a business tax break by allowing immediate write offs of investment for tax purposes instead of requiring the write off over a period of year.

Now the problem with this policy is that it failed to recognize that the fundamental problem with the economy was lack of aggregate demand, which is economics-speak meaning consumers were not buying enough goods and services.  Since business will invest and hire and expand only when there is demand for their products and services, policy that does not address weak demand will be largely ineffective.

And so it was

For Small Businesses, Recession Isn't Over

This anecdotal evidence from the above cited article illustrates the problem.

"Given what our customers perceive as a flattening in the economy, they're being very cautious on capital expenditures," says Tim Reynolds, president of Tribute, which is based in Hudson, Ohio, and sells its software to small industrial distributors. Tribute is continuing to require its 35 employees to take a day of unpaid vacation every month, a policy it implemented during the recession, as it waits for sales to pick up.

Nope, no mention of that tax break, only mention is what many economists already know, until sales increase a company will not hire and invest.

And what about the professional economists view that the recession was over two years ago, A survey of small business owners found that

While about half projected higher revenue a year from now, 78% said the U.S. economy is still in a recession, and many expected it to remain there next year.

The Recession isn’t over!  Well small business owners must be just too busy trying to survive to read the official reports of the economics profession that says it is.  Or, maybe they get their news from Jay Leno, who does know more on this topic than most economists.