Obama’s ‘recovery summer’ is gonna be long and hot

"The United States must be strong at home in order to be strong abroad," declared U.S. Secretary of State Hillary Clinton in May. She went on to "make the national security case about reducing the deficit and getting the debt under control." (Oddly, two days earlier, President Obama’s senior economic advisor Lawrence Summers had pressed for a $200 billion second "stimulus package" of additional spending.)

U.S. influence and power derive in part from the extraordinary success of the American economy. American wealth and innovation have improved lives all over the world, and even in these straitened times, we are far better off than earlier generations. Thus, preserving the exceptional productivity of the American economy is of utmost importance for both domestic and foreign policy.

Now, the efficacy of the $787 billion first stimulus package is much debated. In early 2009, Obama’s advisors predicted that the massive spending program would keep unemployment below eight percent by creating up to 4 million jobs. Lately, the administration speaks of jobs created or saved, but on the former, we are still losing jobs (125,000 in June), and of the latter, no one has yet quantified how many have been preserved. Unemployment persists above nine percent. The administration’s "Recovery Summer" looks to be long and hot; no one can be satisfied with this result.

Why has the stimulus failed to produce better results? Forces even more powerful than the federal government are at work. Like energy itself, market forces can be channeled for good or bad, but not destroyed. The great recession created uncertainty and sapped investor confidence necessary for new enterprises. Eventually, those issues will resolve themselves, as they have in recessions past, and the stimulus should help. Unfortunately, however, other federal policies continue to erode investor confidence.

What evidence is there of business uncertainty? U.S. corporations are hoarding cash. A record $1.84 trillion idles in accounts held by non-financial businesses, up 26 percent from last year-also not a good year for investor confidence. These funds represent enormous untapped economic potential, twice as large as the stimulus package, and likely to be far more productive when spent.

Why are businesses reluctant to invest? They don’t know what new costs, taxes, and regulations they will face.

On healthcare, Speaker of the House Nancy Pelosi said, "We have to pass the bill so that you can find out what is in it." The 2,000-page bill is now law, but lawyers, economists, and accountants are still trying to figure out the implications of the legislation and much will remain unknown until implementing regulations are promulgated by bureaucracies yet to be established. How can a business hire someone when it is impossible to say how much that employee will cost, and specifically how much will be required under mandatory healthcare coverage?

Similarly, legislation that would limit carbon emissions and increase energy costs would have massive effects on the economy. Perhaps optimistically, the Environmental Protection Agency (EPA) recently estimated that cap-and-trade legislation would cost each American household between $79 and $146 per year. Of course, costs to energy-intensive industries would be more severe, and the EPA estimates are far from certain. How should a business calculate the economics of investing in a new plant with an 85-percent uncertainty range for price changes on a key input?

Businesses also face daunting new regulations from virtually every federal agency. Ivan Seidenberg, head of the Business Roundtable, an administration ally, recently observed, "We see a host of laws, regulations and other policies being enacted that impose a government prescription of how individual industries ought to be structured, rather than produce an environment in which the private sector can innovate, invest and create jobs in this modern global economy." Outbursts such as the president’s search for "whose *ss to kick" or the speaker’s branding the insurance industry as "immoral … villains" inflame rather than solve problems.

In sum, according to Seidenberg, "By reaching into virtually every sector of economic life, government is injecting uncertainty into the marketplace and making it harder to raise capital and create new businesses."

A vibrant economy is vital to American prosperity and national security. The great recession sapped business confidence, but must not erode our faith in the greatest wealth generation instrument in history-our free market economy. For better or worse, the stimulus package is mostly spent, overwhelmed by a sea anchor of policy proposals imposing uncertainty about greater costs, higher taxes, and more regulation. If we are to move forward, we must cut away the drag on growth and restart the engine of our success, private sector investment. For doing so is the only way to create real wealth and to be strong at home and abroad.